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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission file number 1-1043
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BRUNSWICK CORPORATION
(Exact name of registrant in its charter)
Delaware 36-0848180
(State of incorporation) (I.R.S. Employer Identification No.)
1 N. Field Ct. 60045-4811
Lake Forest, Illinois (zip code)
(Address of principal executive
offices)
(847) 735-4700
(Registrant's telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock ($.75 par New York, Chicago, Pacific,
value) and London Stock Exchanges
Securities Registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 17, 1999, the aggregate market value of the voting stock of the
registrant held by non-affiliates was $1,787,833,163. Such number excludes
stock beneficially owned by officers and directors. This does not constitute
an admission that they are affiliates.
The number of shares of Common Stock ($.75 par value) of the registrant
outstanding as of March 17, 1999, was 91,978,555.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates by reference certain
information from the Company's definitive Proxy Statement for the Annual
Meeting scheduled to be held on April 21, 1999.
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PART I
Item 1. Business
Brunswick Corporation (the Company) is a multinational, branded consumer
products company serving the outdoor and indoor active recreation markets. Its
major brands include Zebco, Quantum, Martin, and Browning fishing reels and
reel/rod combinations; MotorGuide and Thruster trolling motors; Swivl-Eze
marine accessories; American Camper, Remington and American Trails camping
products; Remington and Weather-Rite apparel; Igloo and Playmate coolers and
ice chests and Kool Mate thermoelectric products; Hoppe's gun care products;
Mongoose, Mongoose Pro and Roadmaster bicycles; Flexible Flyer wagons and
sleds; Brunswick Recreation Centers and Brunswick bowling capital equipment,
supplies and consumer products; Brunswick billiards tables; Life Fitness,
Hammer Strength and ParaBody fitness equipment; Sea Ray, Bayliner and Maxum
pleasure boats; Baja high-performance boats; Boston Whaler and Robalo offshore
fishing boats; Mercury and Mariner outboard engines; and Mercury MerCruiser
sterndrives and inboard engines.
Since mid-1995, the Company has been implementing growth strategies to
expand its active recreation business by creating superior products and
services, pursuing innovation, aggressively marketing its leading brands and
acquiring complementary businesses to enhance growth of its core products.
Further, the Company uses effective cost management and investments in
technology to drive operating margin improvement.
The Company operates in four operating segments: Outdoor Recreation, Indoor
Recreation, Boat and Marine Engine. See Note 3 to consolidated financial
statements on pages 37 to 39 for financial information about these segments.
Outdoor Recreation Segment
The Outdoor Recreation segment consists of the Zebco, American Camper,
Brunswick Bicycles and Igloo businesses.
Zebco markets and manufactures fishing equipment, and the Company believes
that it holds the leading domestic market share of fishing reels and reel/rod
combinations. Zebco also manufactures and sells fishing pedestals, ski tows,
pylons and electric trolling motors for anglers and for use by boat
manufacturers including the Company's boat units. In addition, Zebco
manufactures and sells gun care products under the Hoppe's brand.
American Camper markets and manufactures camping products, which include
sleeping bags, tents, backpacks, canvas bags, foul-weather gear, waders,
hunting apparel, propane lanterns and stoves, cookware and utensils.
Brunswick Bicycles markets and manufactures bicycles, wagons, sleds and
bicycle parts and accessories.
Igloo markets and manufactures ice chests, beverage coolers and
thermoelectric products. The Company believes that Igloo is the domestic
market leader in ice chests, beverage coolers and thermoelectric products.
See Note 4 to the consolidated financial statements on pages 39 to 40 for
the strategic actions taken in the Outdoor Recreation segment to streamline
operations and enhance operating efficiencies.
The Company's outdoor recreation products are sold by Company sales
personnel and manufacturers' representatives to mass merchants, retailers,
distributors, dealers and OEM manufacturers. Sales of outdoor recreation
products to one mass merchant represented 43 percent, 37 percent and 34
percent of the segment's sales for 1998, 1997 and 1996, respectively. The
Company also sells certain products directly to customers. Outdoor recreation
products are distributed worldwide from warehouses, sales offices and factory
stocks of merchandise.
1
Indoor Recreation Segment
The Indoor Recreation segment includes the Brunswick Indoor Recreation
Group (BIRG) and the Life Fitness and Brunswick Billiards businesses.
BIRG is the leading manufacturer of bowling products, including bowling
balls and capital equipment such as bowling lanes, automatic pinsetters, ball
returns, seating and locker units. BIRG also sells computerized bowling
scoring equipment, which is manufactured to its specifications.
BIRG operates 124 recreation centers worldwide, and its joint ventures
operate 31 recreation centers. Recreation centers offer bowling and, depending
on size and location, the following activities and services: billiards, video
games, children's playrooms, restaurants and cocktail lounges. BIRG also
operates five family entertainment centers, which in addition to the above
activities, offer expanded and enhanced game, billiards, restaurant and
entertainment facilities. Almost all of the centers offer Cosmic Bowling, a
glow-in-the-dark bowling experience that transforms bowling into a new and
different form of recreation. Approximately 50 percent of the recreation
center facilities are owned by the Company.
BIRG has a 50 percent interest in Nippon Brunswick K. K., which sells
bowling equipment and operates bowling centers in Japan. The Group has other
joint ventures to (i) build, own and operate bowling centers and family
entertainment centers, which include bowling, billiards and many other games,
in Thailand and (ii) sell bowling equipment in China and Thailand.
See Note 4 to the consolidated financial statements on pages 39 to 40 for
the strategic actions BIRG has taken to streamline operations and enhance
operating efficiencies.
Life Fitness designs, markets and manufactures leading domestic and global
brands of computerized cardiovascular fitness equipment (including treadmills,
cross-training equipment and stationary bikes) and strength training fitness
equipment under the Life Fitness and Hammer Strength brands serving the
commercial (health clubs, gyms, professional sports teams, military,
government, corporate and university facilities) and high-end consumer
markets. Life Fitness expanded its product offerings with the acquisition in
January 1998 of ParaBody, Inc., the leader in multistation gyms and benches
and racks.
The Company sells billiards tables which are manufactured to its
specifications.
The Company's indoor recreation products are sold to mass merchants,
distributors, dealers, bowling centers and retailers. The Company also sells
certain products directly to customers. Indoor recreation products are
distributed worldwide from regional warehouses, sales offices and factory
stocks of merchandise.
Boat Segment
The Boat segment consists of Sea Ray and US Marine, marketers and
manufacturers of fiberglass pleasure and offshore fishing boats. The Company
believes its boat segment has the largest dollar sales volume of pleasure
boats in the world.
Sea Ray, best recognized for its luxury yachts, cabin cruisers and sport
boats marketed and manufactured under the same name, also markets and
manufactures Baja high-performance boats and Boston Whaler offshore fishing
boats. Sea Ray obtains its outboard motors and most of its sterndrives and
gasoline inboard engines from Mercury Marine.
US Marine, known for its Bayliner brand of motor yachts, cabin cruisers and
runabouts, also markets and manufactures Maxum runabouts and cabin cruisers,
and Robalo sport fishing boats. Escort boat trailers also are produced by US
Marine and are sold with smaller boats as part of boat-motor-trailer packages.
US Marine obtains its outboard motors, sterndrives and gasoline inboard
engines from Mercury Marine.
2
Marine Engine Segment
The Marine Engine segment consists of Mercury Marine. The Company believes
its Marine Engine segment has the largest dollar sales volume of recreational
marine engines in the world.
Mercury Marine markets and manufactures a full range of outboard engines,
sterndrives and inboard engines, and propless water-jet systems under the
familiar Mercury, Mariner, Mercury MerCruiser and Mercury SportJet brand
names. A portion of Mercury Marine's outboards and parts and accessories,
including steering systems, instruments, controls, propellers, service aids
and marine lubricants, are sold directly to end-users through dealers. The
remaining outboards and virtually all of the sterndrives and inboard engines
and the water-jet systems are sold to independent boat builders or are
transferred to the Company's boat units.
Mercury Marine has four OptiMax outboard engines ranging from 135-
horsepower to 225-horsepower which feature Mercury's new direct fuel injection
(DFI) technology, and Mercury Marine intends to introduce a 115-horsepower
OptiMax engine with DFI in July 1999. DFI is part of Mercury's plan to reduce
engine emissions by 75 percent by 2006 to comply with U.S. Environmental
Protection Agency requirements. Mercury's line of low-emission engines also
includes four-cycle outboards ranging from 4-horsepower to 50-horsepower, and
Mercury Marine intends to introduce 75-horsepower and 90-horsepower four-cycle
outboards in July 1999. These OptiMax and four-cycle outboards meet the EPA's
reduced emission levels. The California Air Resource Board has mandated that
the EPA's 2006 emission levels must be met by 2001 in California and has
scheduled further emission reductions for 2004 and 2008. Mercury's OptiMax and
four-cycle outboards meet the California 2001 requirements, and some of these
engines meet the 2004 standards. Mercury Marine believes that it will be able
to satisfy the 2004 and 2008 California standards.
The Company has a minority interest in Tracker Marine, L.P., a limited
partnership, which manufactures and markets boats, motors, trailers and
accessories. The Company has various agreements with Tracker Marine, L.P. and
its affiliates, including contracts to supply outboard motors, trolling motors
and various other Brunswick products for Tracker Marine boats.
International Operations
The Outdoor Recreation segment sells its products worldwide and has sales
and distribution centers in France, Germany and the United Kingdom and a
distribution center in Canada. Brunswick Bicycles has two plants that
manufacture bicycles in Mexico.
BIRG sells its products worldwide and has sales offices in various
countries. BIRG has a plant that manufactures pinsetters in Hungary. BIRG
operates recreation centers in Canada, Austria and Germany and has joint
ventures in Asia that sell bowling equipment and/or operate bowling centers.
Life Fitness sells its products worldwide and has sales and distribution
centers in Holland and the United Kingdom as well as sales offices in Austria,
Germany, Italy, Hong Kong and Brazil.
Sea Ray and US Marine boats and Mercury Marine engines are sold worldwide
through dealers. Sea Ray has a sales office in France.
Mercury Marine has an assembly plant and distribution center in Belgium, an
assembly plant in Mexico and sales and distribution centers in Europe, Asia,
Australia and North and South America.
The Company's foreign sales are set forth in Note 3 to consolidated
financial statements on pages 37 to 39. In 1998, sales to Europe and the
Pacific Rim were 51.2 percent and 17.3 percent, respectively, of foreign
sales. Sales of marine engine products comprised the largest share of
international sales in 1998.
3
Raw materials
Raw materials are purchased from various sources. At present, no critical
raw material shortages are anticipated. General Motors Corporation is the sole
supplier of engine blocks used to manufacture the Company's gasoline
sterndrives.
Patents, trademarks and licenses
The Company has and continues to obtain patent rights, consisting of
patents and patent licenses, covering certain features of the Company's
products and processes. The Company's patents, by law, have a limited life,
and rights expire periodically.
In the Outdoor Recreation segment, patent rights principally relate to
fishing reels, electric trolling motors, bicycles, ice chests, coolers and
thermoelectric products. In the Indoor Recreation segment, patent rights
principally relate to computerized bowling scorers and business information
systems, bowling lanes and related equipment, bowling balls, fitness equipment
and components for billiards tables.
In the Marine Engine segment, patent rights principally relate to features
of outboard motors and inboard-outboard drives, including die-cast powerheads,
cooling and exhaust systems, drive train, clutch and gearshift mechanisms,
boat/engine mountings, shock absorbing tilt mechanisms, ignition systems,
propellers, spark plugs and fuel and oil injection systems.
The Company does not believe that any of its patents are material to
segment results of operations, and the Company believes that its success is
mainly dependent upon its engineering, manufacturing and marketing
capabilities.
The following are trademarks or registered trademarks of the Company:
Advent, American Camper, American Trails, Anvilane Pro Lane, Baja, Bayliner,
Boston Whaler, Brunswick, Brunswick Zone, Capri, Clearview, Cosmic Bowling,
DBA Products, Hammer Strength, Hoppe's, HyperDrive, Igloo, Kool Mate, Life
Fitness, Lightworx, Mariner, Martin, Maxum, MerCruiser, MercuryCare, Mercury
Marine, Mongoose, Mongoose Pro, MotorGuide, OptiMax, ParaBody, Playmate,
Quantum, Quicksilver, Roadmaster, Robalo, Sea Ray, Softmate, SpaceMate, Sport
Jet, Swivl-Eze, Throbot, Thruster, Trophy, True Technologies, U.S. Play by
Brunswick, Zebco and Zone. These trademarks have indefinite lives, and many of
these trademarks are well known to the public and are considered valuable
assets of the Company. Brunswick uses the Browning trademark under licenses
expiring in 2025 with two renewal terms of 33 years each, the Flexible Flyer
trademark under a perpetual license and the Remington trademark under licenses
expiring on December 31, 2000 with renewal terms expiring on December 31,
2006.
Competitive conditions and position
The Company believes that it has a reputation for quality in its highly-
competitive lines of business. The Company competes in its various markets by
utilizing efficient production techniques and innovative marketing,
advertising and sales efforts, and by providing high-quality products at
competitive prices.
Strong competition exists with respect to each of the Company's product
groups, but no single manufacturer competes with the Company in all product
groups. In each product area, competitors range in size from large, highly
diversified companies to small producers. The following summarizes the Company
position in each segment.
Outdoor Recreation. The Company competes directly with many manufacturers
of recreation products. In view of the diversity of its recreation products,
the Company cannot identify the number of its competitors. The Company
believes, however, that in the United States, it is one of the largest
manufacturers of fishing reels, bicycles, sleeping bags, ice chests, beverage
coolers, and thermoelectric products. For these recreation products,
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competitive emphasis is placed on product innovation, quality, marketing
activities, pricing and the ability to meet delivery and performance
requirements.
Indoor Recreation. The Company believes it is the world's largest
manufacturer of bowling capital equipment and of commercial fitness equipment.
Certain bowling products, such as automatic scorers and computerized
management systems, and many fitness equipment products represent innovative
developments in the market. For bowling products and fitness equipment
competitive emphasis also is placed on quality, marketing activities and
pricing. The Company operates 124 recreation centers and five family
entertainment centers worldwide. Each center competes directly with centers
owned by other parties in its immediate geographic area. Competitive emphasis
is, therefore, placed on customer service, quality facilities and personnel,
and prices.
Boat. The Company believes it has the largest dollar sales volume of
pleasure boats in the world. There are many manufacturers of pleasure and
offshore fishing boats; consequently, this business is highly competitive. The
Company competes on the basis of product features and technology, quality,
value, performance, durability, styling and price. Demand for pleasure boats
is influenced by a number of factors, including consumer education about
boating, economic conditions and, to some extent, prevailing interest rates
and consumer confidence.
Marine Engine. The Company believes it has the largest dollar sales volume
of recreational marine engines in the world. The marine engine market is
highly competitive among several major companies and many smaller ones. There
are also many competitors in the highly-competitive marine accessories
business. Competitive advantage in the marine engine and accessories markets
is a function of product features, technology leadership, service, effective
distribution and pricing.
Research and development
The Company's research investments, relating to the development of new
products or to the improvement of existing products, are shown below:
1998 1997 1996
----- ----- -----
(In millions)
Outdoor Recreation......................................... $ 3.6 $ 3.3 $ 2.6
Indoor Recreation.......................................... 16.6 11.2 8.5
Boat....................................................... 17.6 15.3 15.3
Marine Engine.............................................. 49.7 59.6 60.1
----- ----- -----
$87.5 $89.4 $86.5
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Number of employees
The number of employees at December 31, 1998, is shown below by operating
segment:
Outdoor Recreation.................................................... 3,700
Indoor Recreation..................................................... 7,350
Boat.................................................................. 8,200
Marine Engine......................................................... 6,100
Corporate............................................................. 150
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25,500
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There are approximately 1,050 employees in the Outdoor Recreation segment,
400 employees in the Indoor Recreation segment and 2,400 employees in the
Marine Engine segment who are represented by labor unions. The Company
believes that relations with these labor unions are good.
5
Environmental requirements
The Company is involved in certain legal and administrative proceedings
under the Comprehensive Environmental Response Compensation and Liability Act
of 1980 and other federal and state legislation governing the generation and
disposition of certain hazardous wastes. These proceedings, which involve both
on- and off-site waste disposal, in many instances seek compensation from the
Company as a waste generator under Superfund legislation, which authorizes
action regardless of fault, legality of original disposition or ownership of a
disposal site. The Company believes it has established adequate reserves to
cover all known claims. The Company believes that compliance with federal,
state and local environmental laws will not have a material effect on the
Company's capital expenditures, earnings or competitive position.
Item 2. Properties
The Company's headquarters are located in Lake Forest, Illinois. The
Company has numerous manufacturing plants, distribution warehouses, sales
offices and test sites. Research and development facilities are division-
related, and most are located at individual manufacturing sites.
The Company's plants are deemed to be suitable and adequate for the
Company's present needs. The Company believes that all of its properties are
well maintained and in good operating condition. Most plants and warehouses
are of modern, single-story construction, providing efficient manufacturing
and distribution operations. The Company's plants are operating at
approximately 72 percent of current capacity. The Company's headquarters and
most of its principal plants are owned by the Company.
The two Texas plants, where Igloo coolers, ice chests and thermoelectric
products are manufactured, are leased. One of these leases expires in 2003;
the other expires in 2004 and has renewal terms extending to 2029 with an
option to purchase.
Three plants where bicycles are manufactured are leased. The plant in
Olney, Illinois is leased until 2001 with renewal terms extending to 2026. One
plant in Ojinaga, Mexico is leased until 2007 with renewal options to 2017 and
an option to purchase, and the other plant in Ojinaga, Mexico is leased until
2008 with renewal options to 2018 and an option to purchase.
The offices and warehouse for the American Camper business in Lenexa,
Kansas are leased until 2004 with renewal options to 2014. Two plants which
manufacture sleeping bags are leased. The sleeping bag plant in Haleyville,
Alabama is leased until 2006 with renewal options to 2016 and an option to
purchase. The plant in St. George, Utah is leased until August 31, 1999, with
a renewal option until 2002.
The principal warehouse for the Life Fitness Division in Franklin Park,
Illinois is leased through 2011 with an option to purchase in December of 1999
and 2000. A Life Fitness plant in Paso Robles, California is leased until
2003, and a ParaBody plant in Ramsey, Minnesota is leased until December 31,
2000.
Approximately 50 percent of the bowling recreation centers, one test
facility and six distribution centers are also leased.
The Company's primary facilities are in the following locations:
Outdoor Recreation
Haleyville, Alabama; Olney, Illinois; Lenexa, Kansas; Starkville,
Mississippi; Tulsa, Oklahoma; Coatesville, Pennsylvania; Houston, Katy and
Lancaster, Texas; St. George, Utah; Delavan, Wisconsin and Ojinaga, Mexico.
6
Indoor Recreation
Paso Robles, California; Franklin Park, Illinois; Falmouth, Kentucky;
Muskegon, Michigan; Ramsey, Minnesota; Bristol, Wisconsin; Szekesfehervar,
Hungary; and 124 recreation centers and five family entertainment centers in
the United States, Canada and Europe.
Boat
Phoenix, Arizona; Edgewater, Merritt Island, Palm Coast and Tallahassee,
Florida; Valdosta, Georgia; Cumberland and Salisbury, Maryland; Pipestone,
Minnesota; Bucyrus, Ohio; Miami and Claremore, Oklahoma; Roseburg, Oregon;
Dandridge, Knoxville and Vonore, Tennessee; and Arlington and Spokane,
Washington.
Marine Engine
Placida and St. Cloud, Florida; Stillwater, Oklahoma; Fond du Lac,
Milwaukee and Oshkosh, Wisconsin; Petit Rechain, Belgium and Juarez, Mexico.
Item 3. Legal Proceedings
On June 19, 1998, a jury awarded $44.4 million in damages in a suit brought
in December 1995 by Independent Boat Builders, Inc., a buying group of boat
manufacturers and 22 of its members. The lawsuit, Concord Boat Corporation, et
al. v. Brunswick Corporation (Concord), was filed in the United States
District Court for the Eastern District of Arkansas, and alleged that the
Company unlawfully monopolized, unreasonably restrained trade in, and made
acquisitions that substantially lessened competition in the market for
sterndrive and inboard marine engines in the United States and Canada. Under
the antitrust laws, the damage award has been trebled, and plaintiffs will be
entitled to their attorneys' fees and interest. Under current law, any and all
amounts paid by the Company will be deductible for tax purposes.
The trial court judge denied the Company's post-trial motions seeking to
set aside the verdict and for a new trial. The judge also denied all forms of
equitable relief sought by the plaintiffs in connection with the jury verdict,
including their requests for divestiture of the Company's principal boat
manufacturing operations and orders precluding the Company from implementing
various marketing and pricing programs and from acquiring other marine-related
companies or assets. The judge granted the Company's motion for judgment as a
matter of law on its counterclaim which asserted a per se violation of the
antitrust laws by a group of six of the plaintiffs and awarded nominal
damages. Plaintiffs dismissed, voluntarily, two related claims which had
alleged that the Company attempted to monopolize the outboard engine and
sterndrive boat markets.
On November 4, 1998, the Company filed an appeal contending the Concord
verdict was erroneous as a matter of law, both as to liability and damages.
Plaintiffs filed a cross appeal on the denial of equitable relief and on the
judgment against certain of them on the counterclaim. The Company is not
presently able to reasonably estimate the ultimate outcome of this case, and
accordingly, no expense for this judgment has been recorded. If the adverse
judgment is sustained after all appeals, satisfaction of the judgment is
likely to have a material adverse effect on the Company's results of
operations for a particular year, but is not expected to have a material
adverse effect on the Company's financial condition.
On October 23, 1998, a suit was filed in the United States District Court
for the District of Minnesota by two independent boat builders alleging
antitrust violations by the Company in the sterndrive and inboard engine
business, seeking to rely on both the liability and damage findings of the
Concord litigation. This suit originally was entitled Alumacraft Boats Co., et
al. v. Brunswick Corporation, but Alumacraft Boats Co. was dismissed without
prejudice shortly after the suit was filed. Now captioned KK Motors et al. v.
Brunswick Corporation (KK Motors), the named plaintiffs also seek to represent
a class of all allegedly similarly situated boat builders whose claims have
not been resolved in Concord or in other judicial proceedings. Sales of
sterndrive and inboard marine engines to the Concord plaintiffs are estimated
to have represented less than one-fifth of the total sold to
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independent boat builders during the six-and-one-half year time period for
which damages were awarded in that suit. The complaint in the KK Motors case
seeks damages for a time period covering slightly less than four years.
On December 23, 1998, Volvo Penta of the Americas, Inc., Brunswick's
principal competitor in the sale of sterndrive marine engines, filed suit in
the United States District Court for the Eastern District of Virginia. That
suit, Volvo Penta of the Americas v. Brunswick Corporation (Volvo), also
invokes the antitrust allegations of the Concord action and seeks injunctive
relief and damages in an unspecified amount for an unspecified time period.
On February 10, 1999, a former dealer of Brunswick boats filed suit in the
United States District Court for the District of Minnesota, also seeking to
rely on the liability findings of the Concord action. This suit, Amo Marine
Products, Inc. v. Brunswick Corporation (Amo) seeks class status purporting to
represent all marine dealers who purchased directly from Brunswick sterndrive
or inboard engines or boats equipped with sterndrive or inboard engines during
the period January 1, 1986 to June 30, 1998. Sales by Brunswick of boats
equipped with sterndrive or inboard engines to dealers accounted for less than
half of such engines produced during the time period covered by the complaint;
sales of such engines directly to dealers were de minimis. The complaint seeks
damages in an unspecified amount and requests injunctive relief.
On February 16, 1999, a suit was filed in the Circuit Court of Washington
County, Tennessee, by an individual claiming that the same conduct challenged
in the Concord action violated various antitrust and consumer protection laws
of 16 states and the District of Columbia. In that suit, Couch v. Brunswick
(Couch), plaintiff seeks to represent all indirect purchasers in those states
of boats equipped with Brunswick sterndrive or inboard engines. The plaintiff
claims damages in an unspecified amount during the period from 1986 to the
filing of the complaint and also requests injunctive relief.
It is possible that additional suits will be filed, in either federal or
state court, asserting allegations similar to those in the existing complaints
and purporting to represent similar or overlapping classes of claimants.
The Company has answered or will answer each of these new complaints
denying liability and asserting various defenses. In addition, the Company has
filed or will file motions to stay all proceedings in each of these matters
pending the resolution of the appeal in the Concord action because it believes
that an appellate decision in that matter is likely to have an impact on each
of these recently filed actions. In the KK Motors case, the court has granted
a stay of all proceedings on the merits of plaintiffs' claims, but has allowed
the case to proceed on class certification and certain procedural matters. On
March 10, 1999, the court in the Volvo case denied the Company's motion to
stay. No other stay motions have yet been ruled on.
Because litigation is subject to many uncertainties, the Company is unable
to predict the outcome of any of the above referenced actions. While there can
be no assurance, the Company believes the adverse judgment in the Concord case
is likely to be reversed on appeal and that any such reversal will have an
impact on all related actions. If the Concord judgment is sustained after all
appeals, however, and if the KK Motors and/or Amo cases successfully proceed
as class actions on behalf of all described potential claimants substantially
as alleged, and if plaintiffs are successful, the damages ultimately payable
by the Company would have a material adverse effect on the Company's financial
condition and results of operations. The Company is unable at this time to
assess the magnitude of damages that either Volvo or the Couch plaintiffs
might assert. Because of a variety of factors affecting both the likelihood
and size of any damage award to these or any other potential claimants, the
Company is unable to estimate the range, amount or timing of its overall
possible exposure.
The Federal Trade Commission (FTC) began an investigation in 1997 of
certain of the Company's marketing practices related to the sale of sterndrive
marine engines to boat builders and dealers. The Company believes such
practices were lawful; however, they were discontinued for business reasons
prior to the initiation of the FTC's investigation.
In December 1996, the Internal Revenue Service notified the Company that it
allocated $190.0 million in short-term capital gains and $18.1 million in
ordinary income to the Company and its subsidiaries for 1990 and
8
1991 in connection with two partnership investments by the Company. The IRS
alleges that these investments lacked economic substance, were prearranged and
predetermined, and had no legitimate business purpose. The Company strongly
disagrees with the IRS position and contested the IRS allocation in a trial in
the United States Tax Court in September 1998. A decision has not yet been
rendered. If the IRS were to prevail, the Company would owe the IRS
approximately $60 million in taxes, plus accrued interest. The Company does
not believe that this case will have an unfavorable effect on the Company's
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Company
The Company's executive officers are listed in the following table:
Officer Present Position Age
------- ---------------- ---
P. N. Larson*........... Chairman and Chief Executive Officer 59
P. B. Hamilton*......... Executive Vice President, Chief Financial Officer and 52
Chairman-Indoor Recreation
G. W. Buckley*.......... Senior Vice President and President-Mercury Marine Group 53
D. E. Lyons*............ Senior Vice President-Strategic Business Development and 58
Chairman-US Marine
M. D. Allen............. Vice President, General Counsel and Secretary 53
W. J. Barrington*....... Vice President and President-Sea Ray Group 48
K. J. Chieger........... Vice President-Corporate and Investor Relations 50
F. J. Florjancic, Jr.*.. Vice President and President-Brunswick Indoor Recreation Group 52
A. L. Nieto*............ Vice President and President-Life Fitness Division 41
R. S. O'Brien........... Vice President and Treasurer 49
V. J. Reich............. Vice President and Controller 41
J. A. Schenk............ Vice President-Acquisitions 56
R. L. Sell.............. Vice President and Chief Information Officer 48
K. B. Zeigler........... Vice President and Chief Human Resources Officer 50
J. P. Zelisko........... Vice President-Tax 48
J. D. Russell........... President-US Marine Division 46
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* Members of the Operating Committee
There are no family relationships among these officers. The term of office
of all elected officers expires April 21, 1999. The Group and Division
Presidents are appointed from time to time at the discretion of the Chief
Executive Officer.
Peter N. Larson has been Chairman and Chief Executive Officer of the
Company since 1995. He was Executive Officer, Johnson & Johnson, a leading
health care company, from 1991 to 1995, where he served as Chairman of the
Worldwide Consumer and Personal Care Group and was a member of the Executive
Committee and the Board of Directors.
Peter B. Hamilton has been Executive Vice President, Chief Financial
Officer and Chairman-Indoor Recreation since 1998. He was Senior Vice
President and Chief Financial Officer from 1995 to 1998. He was
9
Vice President and Chief Financial Officer, Cummins Engine Company, Inc., a
leading worldwide designer and manufacturer of diesel engines and related
products, from 1988 to 1995.
George W. Buckley has been Senior Vice President since 1998 and President-
Mercury Marine Group since 1997. He was a Vice President of the Company from
1997 to 1998. He was President of the U.S. Electrical Motors Division of
Emerson Electric Co., a manufacturer of electrical, electronic, and
electromagnetic products (Emerson), from 1996 to 1997, and President of
Emerson's Automotive and Precision Motors Division from 1994 to 1996. He was
Emerson's Chief Technology Officer for Motors, Drives and Appliance Components
from 1993 to 1994.
Dudley E. Lyons has been Senior Vice President-Strategic Business
Development and Chairman-US Marine since 1998. He was Vice President-Strategic
Business Development from 1997 to 1998. From 1992 to 1997 he was President of
the Management Consulting Group of Marketing Corporation of America, a
management consulting, sales promotion and market research firm.
Mary D. Allen has been Vice President, General Counsel and Secretary since
1997. She was Executive Vice President, General Counsel and Secretary for
Hartmarx Corporation, a clothing manufacturer, from 1994 to 1997, and Senior
Vice President, JMB Realty Corp., a real estate investment firm, from 1987 to
1994.
William J. Barrington has been Vice President since 1998 and President-Sea
Ray Group since 1989.
Kathryn J. Chieger has been Vice President-Corporate and Investor Relations
of the Company since 1996. She was Vice President-Corporate Affairs of Gaylord
Container Corporation, a paper manufacturer, from 1994 to 1996.
Frederick J. Florjancic, Jr. has been Vice President since 1988 and
President-Brunswick Indoor Recreation Group since 1995. He was President-
Brunswick Division from 1988 to 1995.
Augustine L. Nieto has been Vice President since 1998 and President-Life
Fitness Division since the Company acquired it in 1997. He co-founded Life
Fitness in 1977 and had been its President since 1987.
Richard S. O'Brien has been Vice President of the Company since 1996 and
Treasurer of the Company since 1988.
Victoria J. Reich has been Vice President and Controller of the Company
since 1996. She was Finance Manager of the General Electric Company's Wiring
Devices business from 1994 to 1996 and Manager of the G.E. Plastics Customer
Financial Services Operation from 1993 to 1994.
James A. Schenk has been Vice President-Acquisitions since 1998. He was
Staff Vice President- Acquisitions and Alliances from 1997 to 1998 and Staff
Vice President-Corporate Planning from 1996 to 1997. He was Corporate Director
of Planning and Development of the Company from 1988 to 1996.
Robert L. Sell has been Vice President and Chief Information Officer of the
Company since 1998. From 1996 to 1997 he was Vice President-Information
Technology of Coors Brewing Company, a manufacturer and distributor of beer
and other malt beverages (Coors), and from 1989 to 1996 he was Director of
Applications for Information Technology of Coors.
Kenneth B. Zeigler has been Vice President and Chief Human Resources
Officer of the Company since 1995. He was Senior Vice President, The
Continental Corporation, a property and casualty insurance holding company,
from 1992 to 1995.
Judith P. Zelisko has been Vice President-Tax since 1998. She was Staff
Vice President-Tax from 1996 to 1998 and was Director of Tax and Assistant
Vice President from 1983 to 1996.
10
John D. Russell has been President-US Marine Division since July 1998. He
was President of the Brunswick Billiards business from January 1998 to June
1998. He was Executive Vice President-Strategy and Operations of the Mercury
Marine Group during 1997 and was Executive Vice President-Strategy and Finance
of the Mercury Marine Group from 1994 to 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock is traded on the New York, Chicago, Pacific, and
London Stock Exchanges. Quarterly information with respect to the high and low
prices for the common stock and the dividends declared on the common stock is
set forth in Note 18 to consolidated financial statements on pages 55 and 56.
As of December 31, 1998, there were approximately 15,600 shareholders of
record of the Company's common stock.
Item 6. Selected Financial Data
Net sales, net earnings, basic and diluted earnings per common share, cash
dividends declared per common share, assets of continuing operations, long-
term debt and other financial data are shown in the Six-Year Financial Summary
on pages 57 and 58.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis is presented on pages 18 to 29.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Risk Management is presented on pages 28 and 29.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements are set forth on pages 31
to 58 and are listed in the index on page 17.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Company is set forth on
pages 2 to 4 of the Company's definitive Proxy Statement dated March 22, 1999,
(the Proxy Statement) for the Annual Meeting of Stockholders to be held on
April 21, 1999, and information with respect to Section 16(a) Beneficial
Ownership Reporting Compliance is set forth on page 21 of the Proxy Statement.
All of the foregoing information is hereby incorporated by reference. The
Company's executive officers are listed herein on pages 9 to 11.
Item 11. Executive Compensation
Information with respect to executive compensation is set forth on pages 5
to 21 of the Proxy Statement and is hereby incorporated by reference.
11
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to the securities of the Company owned by the
directors and certain officers of the Company, by the directors and officers
of the Company as a group and by the only persons known to the Company to own
beneficially more than 5 percent of the outstanding voting securities of the
Company is set forth on pages 6 and 7 of the Proxy Statement, and such
information is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a) Financial Statements and Exhibits
Financial Statements
Financial statements and schedules are incorporated in this Annual Report
on Form 10-K, as indicated in the index on page 17.
Exhibits
Exhibits
- --------
3.1 Restated Certificate of Incorporation of the Company filed as Exhibit
19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987, and hereby incorporated by reference.
3.2 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for 1995, and hereby incorporated by
reference.
3.3 By-Laws of the Company filed as Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, and hereby
incorporated by reference.
4.1 Indenture dated as of March 15, 1987, between the Company and Continental
Illinois National Bank and Trust Company of Chicago filed as Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1987, and hereby incorporated by reference.
4.2 Officers' Certificate setting forth terms of the Company's $125,000,000
principal amount of 7 3/8% Debentures due September 1, 2023, filed as
Exhibit 4.3 to the Company's Annual Report on Form 10-K for 1993, and
hereby incorporated by reference.
4.3 Form of the Company's $250,000,000 principal amount of 6 3/4% Notes due
December 15, 2006, filed as Exhibit 4.1 to the Company's Current Report
on Form 8-K dated December 10, 1996, and hereby incorporated by
reference.
4.4 Form of the Company's $200,000,000 principal amount of 7 1/8% Notes due
August 1, 2007, filed as Exhibit 4.1 to the Company's Current Report on
Form 8-K dated August 4, 1997, and hereby incorporated by reference.
4.5 The Company's agreement to furnish additional debt instruments upon
request by the Securities and Exchange Commission filed as Exhibit 4.10
to the Company's Annual Report on Form 10-K for 1980, and hereby
incorporated by reference.
4.6 Rights Agreement dated as of February 5, 1996, between the Company and
Harris Trust and Savings Bank filed as Exhibit 1 to the Company's
Registration Statement for Preferred Share Purchase Rights on Form 8-A
dated March 13, 1996, and hereby incorporated by reference.
12
10.1* Amended and Restated Employment Agreement dated January 4, 1999, by and
between the Company and Peter N. Larson.
10.2* Amended and Restated Employment Agreement dated December 1, 1998, by
and between the Company and Dudley E. Lyons.
10.3* Employment Agreement dated December 1, 1995, by and between the Company
and Peter B. Hamilton filed as Exhibit 10.8 to the Company's Annual
Report on Form 10-K for 1995 and hereby incorporated by reference.
10.4* Amendment dated as of October 9, 1998, to Employment Agreement by and
between the Company and Peter B. Hamilton filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998, and hereby incorporated by reference.
10.5* Form of Change of Control Agreement by and between the Company and each
of M. D. Allen, W. J. Barrington, G. W. Buckley, K. J. Chieger, F. J.
Florjancic, Jr., P. B. Hamilton, D. E. Lyons, R. S. O'Brien, V. J.
Reich, J. D. Russell, J. A. Schenk, R. L. Sell, K. B. Zeigler, and J.
P. Zelisko filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, and hereby
incorporated by reference.
10.6* 1994 Stock Option Plan for Non-Employee Directors filed as Exhibit A to
the Company's definitive Proxy Statement dated March 25, 1994, for the
Annual Meeting of Stockholders on April 27, 1994, and hereby
incorporated by reference.
10.7* 1995 Stock Plan for Non-Employee Directors filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998 and hereby incorporated by reference.
10.8* Supplemental Pension Plan filed as Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
and hereby incorporated by reference.
10.9* Form of insurance policy issued for the life of each of the Company's
executive officers, together with the specifications for each of these
policies, filed as Exhibit 10.21 to the Company's Annual Report on Form
10-K for 1980 and hereby incorporated by reference. The Company pays
the premiums for these policies and will recover these premiums, with
some exceptions, from the policy proceeds.
10.10* Form of Indemnification Agreement by and between the Company and each
of N. D. Archibald, J. L. Bleustein, M. J. Callahan, M. A. Fernandez,
P. Harf, J. W. Lorsch, R. P. Mark, B. Martin Musham, K. Roman, R. L.
Ryan and R. W. Schipke filed as Exhibit 19.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1986, and
hereby incorporated by reference.
10.11* Indemnification Agreement dated April 1, 1995, by and between the
Company and P. N. Larson filed as Exhibit 10.17 to the Company's Annual
Report on Form 10-K for 1995 and hereby incorporated by reference.
10.12* Indemnification Agreement by and between the Company and each of M. D.
Allen, W. J. Barrington, G. W. Buckley, K. J. Chieger, F. J.
Florjancic, Jr., P. B. Hamilton, D. E. Lyons, R. S. O'Brien, V. J.
Reich, J. D. Russell, J. A. Schenk, R. L. Sell, K. B. Zeigler and J. P.
Zelisko filed as Exhibit 19.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1986, and hereby incorporated
by reference.
10.13* 1991 Stock Plan filed as Exhibit A to the Company's definitive Proxy
Statement dated March 22, 1999, for the Annual Meeting of Stockholders
on April 21, 1999 and hereby incorporated by reference.
10.14* Change in Control Severance Plan filed as Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for September 30, 1998, and hereby
incorporated by reference.
10.15* Brunswick Performance Plan for 1998 filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for 1997, and hereby incorporated
by reference.
10.16* Brunswick Performance Plan for 1999.
13
10.17* Brunswick Strategic Incentive Plan for 1997-1998 filed as Exhibit 10.25
to the Company's Annual Report on Form 10-K for 1997 and hereby
incorporated by reference.
10.18* Brunswick Strategic Incentive Plan for 1998-1999 filed as Exhibit 10.26
to the Company's Annual Report on Form 10-K for 1997, and hereby
incorporated by reference.
10.19* Brunswick Strategic Incentive Plan for 1999-2000.
10.20* 1997 Stock Plan for Non-Employee Directors filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for September 30, 1998, and
hereby incorporated by reference.
10.21* Elective Deferred Compensation Plan filed as Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for September 30, 1998, and
hereby incorporated by reference.
10.22* Automatic Deferred Compensation Plan filed as Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for September 30, 1998, and
hereby incorporated by reference.
10.23* Employment Agreement dated July 1, 1997, by and between the Company and
Augustine Nieto filed as Exhibit 10.30 to the Company's Annual Report
on Form 10-K for 1997, and hereby incorporated by reference.
12 Statement regarding computation of ratio of earnings to fixed charges.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Public Accountants is on page 59 of this Report.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
- --------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c) of
this Report.
b) Reports on Form 8-K
On October 30, 1998 the Company filed a Current Report on Form 8-K dated
October 27, 1998, reporting in Item 5 that a lawsuit had been filed in Federal
Court in Minnesota claiming Brunswick violated the antitrust laws.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Brunswick Corporation
/s/ Victoria J. Reich
By: _________________________________
Victoria J. Reich
Vice President and Controller
March 22, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title
--------- -----
Peter N. Larson Chairman and Chief Executive Officer
(Principal Executive Officer) and
Director
Peter B. Hamilton Executive Vice President and Chief
Financial Officer (Principal Financial
Officer)
Victoria J. Reich Vice President and Controller (Principal
Accounting Officer)
Nolan D. Archibald Director
Jeffrey L. Bleustein Director
Michael J. Callahan Director
Manuel A. Fernandez Director
Peter Harf Director
Jay W. Lorsch Director
Rebecca P. Mark Director
Bettye Martin Musham Director
Kenneth Roman Director
Robert L. Ryan Director
Roger W. Schipke Director
Victoria J. Reich, as Principal Accounting Officer and pursuant to a Power
of Attorney (executed by each of the other officers and directors listed above
and filed with the Securities and Exchange Commission, Washington, D.C.), by
signing her name hereto does hereby sign and execute this report of Brunswick
Corporation on behalf of each of the officers and directors named above in the
capacities in which the names of each appear above.
/s/ Victoria J. Reich
By: _________________________________
Victoria J. Reich
March 22, 1999
15
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BRUNSWICK CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Management's Discussion and Analysis....................................... 18
Report of Management....................................................... 30
Report of Independent Public Accountants................................... 30
Consolidated Statements of Income 1998, 1997 and 1996...................... 31
Consolidated Balance Sheets December 31, 1998 and 1997..................... 32
Consolidated Statements of Cash Flows 1998, 1997 and 1996.................. 34
Consolidated Statements of Shareholders' Equity 1998, 1997 and 1996........ 35
Notes to Consolidated Financial Statements 1998, 1997 and 1996............. 36
Six-Year Financial Summary................................................. 57
Consent of Independent Public Accountants.................................. 59
Schedule II--Valuation and Qualifying Accounts 1998, 1997 and 1996......... 60
All other schedules are not submitted because they are not applicable or not
required or because the required information is included in the consolidated
financial statements or in the notes thereto. These notes should be read in
conjunction with these schedules.
The separate financial statements of Brunswick Corporation (the parent
company Registrant) are omitted because consolidated financial statements of
Brunswick Corporation and its subsidiaries are included. The parent company is
primarily an operating company, and all consolidated subsidiaries are wholly
owned and do not have any indebtedness (which is not guaranteed by the parent
company) to any person other than the parent or the consolidated subsidiaries
in an amount that is material in relation to consolidated assets.
17
BRUNSWICK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
In 1998, the Company continued implementation of its growth strategies:
creating superior products and services by pursuing innovation, aggressively
marketing its leading brands and acquiring complementary businesses to enhance
growth of its core products. Further, the Company uses effective cost
management and investments in technology to drive operating margin
improvements.
The success of these strategies is evident in the Company's results for
1998. Sales increased nearly 8 percent to a record $3.95 billion on strong
contributions from the Boat and Marine Engine segments, and from the bicycles,
fitness equipment and ice chest and beverage cooler businesses. The strength
of these units more than offset the decline in bowling equipment sales to
Asia, and weak markets for fishing and camping equipment.
Acquisitions, totaling $908.8 million over the past three years, have also
contributed to the Company's sales growth and affect comparability of results.
The businesses acquired include:
Acquisition by Segment Type of Business Closing Date
---------------------- ---------------- ------------
Outdoor Recreation
Mongoose............................... Bicycles 4/28/97
Hoppe's................................ Hunting accessories 3/7/97
Igloo.................................. Coolers and ice chests 1/3/97
Roadmaster............................. Bicycles 9/6/96
American Camper........................ Camping equipment 3/8/96
Indoor Recreation
ParaBody............................... Fitness equipment 1/30/98
DBA Products........................... Bowling lane supplies 11/20/97
Hammer Strength........................ Fitness equipment 11/13/97
Life Fitness........................... Fitness equipment 7/9/97
Boat
Boston Whaler.......................... Offshore fishing boats 5/31/96
Operating earnings totaled $340.2 million in 1998 and include a $60.0
million strategic charge taken in the third quarter, as described in more
detail below. Excluding strategic charges in both 1998 and 1997, operating
earnings increased 8.4 percent, and the Company maintained operating margins
at 10.1 percent.
Results of Operations
The following table sets forth certain ratios and relationships calculated
from the consolidated statements of income:
1998 1997 1996
-------- -------- --------
(Dollars in millions,
except per share data)
Net sales................. $3,945.2 $3,657.4 $3,160.3
Percent increase.......... 7.9% 15.7% 8.7%
Operating earnings........ $ 340.2 $ 270.8 $ 304.8
Net earnings.............. $ 186.3 $ 150.5 $ 185.8
Diluted earnings per
share.................... $ 1.88 $ 1.50 $ 1.88
Expressed as a percentage
of net sales
Gross margin............ 27.5% 27.9% 27.7%
Selling, general and
administrative expense. 15.2% 15.8% 15.3%
Operating margin........ 8.6% 7.4% 9.6%
18
The above table includes a $60.0 million pretax ($41.4 million after tax)
strategic charge recorded in 1998 and a $98.5 million pretax ($63.0 million
after tax) strategic charge recorded in 1997. Net earnings also include an
after-tax gain from discontinued operations of $7.7 million in 1998 and a
charge for the cumulative effect of a change in accounting principle of $0.7
million after tax in 1997. On a pro forma basis, excluding these items, the
amounts are as follows:
1998 1997 1996
------ ------ ------
(Dollars in
millions, except per
share data)
Operating earnings................................... $400.2 $369.3 $304.8
Percent increase..................................... 8.4% 21.2% 18.0%
Operating margin..................................... 10.1% 10.1% 9.6%
Net earnings......................................... $220.0 $214.2 $185.8
Percent increase..................................... 2.7% 15.3% 17.6%
Diluted earnings per share........................... $ 2.22 $ 2.14 $ 1.88
Percent increase..................................... 3.7% 13.8% 14.6%
Net sales rose 7.9 percent to $3,945.2 million in 1998, up from $3,657.4
million in 1997. The gain of $287.8 million is due to $135.0 million of
incremental sales contributed by the businesses acquired in 1998 and 1997,
along with increased sales of boats, marine engines, bicycles, fitness
equipment and ice chests and beverage coolers. Gains in these businesses were
partially offset by a substantial decline in sales of bowling capital
equipment into Asian markets as unfavorable economic trends slowed shipments.
International sales declined 6.5 percent to $806.8 million in 1998, a
reduction of $56.3 million from 1997 levels. In the Pacific Rim, the Company's
sales declined to $139.9 million from $270.6 million primarily due to the
aforementioned decline in sales of bowling capital equipment into Asian
markets. Sales to Europe increased 18.5 percent to $412.8 million in 1998
versus $348.3 million in 1997, reflecting stronger sales of marine engines and
fitness equipment. Sales of marine engine products comprised the largest share
of international sales in 1998.
Sales grew 15.7 percent to $3,657.4 million in 1997 up from $3,160.3
million in 1996, or a $497.1 million increase, of which $437.5 million was due
to incremental sales contributed by the businesses acquired in 1996 and 1997.
The Company also experienced growth in the boat and marine engine businesses
that offset weaker bicycle and camping equipment sales.
The Company's 1997 international sales increased 10.1 percent to $863.1
million versus $784.2 million in 1996. Several factors favorably influenced
this growth, including the aforementioned acquisition of Life Fitness in July
1997. The comparison of 1997 sales levels to 1996 was adversely affected by
the strengthening of the U.S. dollar versus the currencies of key
international markets. Sales to Europe and the Pacific Rim were 40 percent and
31 percent, respectively, of total international sales in 1997. Marine engine
products and bowling equipment comprised the majority of international sales.
The Company's gross margin percentage was 27.5 percent in 1998 versus 28.3
percent in 1997, excluding the $15.6 million inventory component of the 1997
strategic charge included in cost of sales. The reduction reflects the effects
of volume declines and pricing pressures experienced in the bowling capital
equipment, fishing and camping businesses. Additionally, the Company increased
marketing spending in the Boat segment. In the Marine Engine segment, the
higher costs associated with the introduction of low-emission outboard engines
were more than offset by the benefits of productivity enhancements.
Gross margin percentages increased to 28.3 percent in 1997, excluding the
strategic charge, from 27.7 percent in 1996. This gain reflects productivity
enhancements, an improved sales mix and the effect of the Life Fitness
business acquired in July 1997.
Selling, general and administrative (SG&A) expense increased $22.1 million
to $598.4 million in 1998 and included a $15.0 million gain from a settlement
with a boat dealer, MarineMax, Inc. Excluding this gain, SG&A expense as a
percentage of sales was 15.5 percent in 1998 and 15.8 percent in 1997,
reflecting the Company's continuing focus on effective cost management.
19
In 1997, acquired businesses accounted for substantially all of the $92.3
million increase in SG&A expense to $576.3 million. SG&A expense as a
percentage of sales increased to 15.8 percent in 1997 from 15.3 percent in
1996, reflecting the normal operating expense levels of acquired businesses
and increased investments in marketing activities, partially offset by the
favorable effects of cost-management actions.
In 1998, operating earnings totaled $340.2 million versus $270.8 million in
1997 and $304.8 million in 1996. Results in 1998 and 1997 include strategic
charges of $60.0 million and $98.5 million, respectively. Excluding these
charges, 1998 operating earnings increased 8.4 percent to $400.2 million and
in 1997 increased 21.2 percent to $369.3 million. Operating margins on a pre-
charge basis were 10.1 percent in 1998 and 1997 and 9.6 percent in 1996.
Other income totaled $6.3 million in 1998, $16.7 million in 1997 and $18.9
million in 1996. The decrease between 1998 and 1997 primarily relates to the
effect of changes in foreign currency related adjustments, along with a
reduction in the contribution from joint ventures.
The Company's effective tax rate was 37.1 percent in 1998. Excluding the
strategic charge in 1998, the effective tax rate was 36.0 percent, which is
consistent with 1997 and 1996. The average shares used to calculate diluted
earnings per share was 99.0 million, 100.3 million and 98.8 million in 1998,
1997 and 1996, respectively. During the fourth quarter of 1998, the Company
announced and completed a program to repurchase 7.0 million shares of its
common stock. The decrease in average shares outstanding in 1998 is due
primarily to this share repurchase program, which reduced actual shares
outstanding to 91.9 million at December 31, 1998.
Earnings from continuing operations totaled $178.6 million in 1998, $151.2
million in 1997 and $185.8 million in 1996. Excluding the strategic charges
recorded in 1998 and 1997, earnings from continuing operations were $220.0
million in 1998 versus $214.2 million in 1997.
Net earnings per diluted share were $1.88 in 1998, $1.50 in 1997 and $1.88
in 1996. Results in 1998 include a strategic charge ($0.42 per diluted share)
and a gain on discontinued operations ($0.08 per diluted share), while 1997
includes a strategic charge ($0.63 per diluted share) and a charge for the
cumulative effect of an accounting change ($0.01 per diluted share). The gain
on discontinued operations in 1998 totaled $7.7 million after tax and resulted
primarily from the favorable cash settlement of a lawsuit brought by the
Company related to the previously divested Technical segment. Excluding these
items, net earnings per diluted share were $2.22 in 1998 and $2.14 in 1997.
1998 Strategic Charge
During the third quarter of 1998, the Company announced strategic
initiatives to streamline operations and enhance operating efficiencies in
response to the effect of the Asian economic situation on its businesses.
These strategic actions included exiting and disposing of 15 retail bowling
centers in Asia, Brazil and Europe; rationalizing bowling equipment
manufacturing by closing a pinsetter manufacturing plant in China,
accelerating the shutdown of a pinsetter manufacturing plant in Germany and
exiting the manufacture of electronic scorers and components; closing bowling
sales offices in four countries and reducing administrative support; and
rationalizing its manufacturing and distribution of outdoor recreation
products, including the consolidation of certain North American manufacturing
operations and closing seven domestic distribution warehouses. These projects
were substantially completed by the end of 1998.
The Company's financial results for 1998 include a $60.0 million ($41.4
million after tax) charge to operating earnings in the Outdoor and Indoor
Recreation segments to cover exit costs related to these strategic
initiatives. Non-accruable expenses related to the strategic initiatives are
not material and will be expensed as incurred.
The benefits from the above actions did not have a material effect on the
Company's 1998 financial results. The Company expects that the aggregate
pretax savings will total approximately $18 million in 1999 with the
20
amount increasing an incremental $2 million to approximately $20 million per
year thereafter. Of the annual savings, approximately 50 percent is the result
of reduced administrative and sales overhead; 25 percent is the result of the
elimination of losses from under-performing international bowling centers; and
25 percent is the result of more efficient manufacturing and distribution
operations achieved both in the Outdoor and Indoor Recreation segments through
reduced manufacturing personnel, reduced depreciation expense, reduced lease
expense and reductions in operating overhead. Except for the expected pretax
savings, the actions taken in the strategic charge will not have a significant
effect on the Company's revenue or income.
1997 Strategic Charge
During the third quarter of 1997, the Company announced strategic
initiatives to streamline its operations and improve global manufacturing
costs. The initiatives included terminating development efforts on a line of
personal watercraft; closing boat plant manufacturing facilities in Ireland
and Oklahoma; centralizing European marketing and customer service in the
Marine Engine segment; rationalizing manufacturing of bowling equipment
including the shutdown of a pinsetter manufacturing plant in Germany and
outsourcing the manufacture of certain components in the Company's bowling
division; consolidating fishing reel manufacturing; and other actions directed
at manufacturing rationalization, product profitability improvements and
general and administrative expense efficiencies. These actions were
substantially completed at the end of 1998.
Included in the Company's financial results in 1997 was a $98.5 million
($63.0 million after tax) charge to operating earnings to cover exit costs
related to the strategic initiatives. The charge consisted of $3.4 million
recorded in the Outdoor Recreation segment, $20.4 million recorded in the
Indoor Recreation segment, $14.1 million recorded in the Boat segment and
$60.6 million recorded in the Marine Engine segment.
The benefits from the above actions did not have a material effect on the
Company's 1997 financial results. In 1998, the Company achieved pretax savings
resulting from the strategic actions in line with the original expectations of
approximately $15 million. This amount is expected to increase an incremental
$5 million to approximately $20 million per year in 1999 and thereafter. Of
the annual savings, approximately 35 percent is the result of a decline in
administrative and sales overhead achieved through reduced personnel,
depreciation expense, lease expense and operating expense; 35 percent is the
result of the elimination of losses from the development of the personal
watercraft product and under-performing bowling center assets; and 30 percent
is the result of more efficient manufacturing operations achieved through
reduced manufacturing personnel, depreciation expense and other manufacturing
overhead costs. Except for the expected pretax savings, the actions taken in
the strategic charge will not have a significant effect on the Company's
revenue or income.
Segment Information
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and
Related Information." As a result, the Company now reports its results in four
operating segments: Outdoor Recreation, Indoor Recreation, Boat and Marine
Engine. Refer to Note 3 to consolidated financial statements for a discussion
on the products within each segment and Note 5 to consolidated financial
statements concerning business acquisitions.
Outdoor Recreation Segment
The following table sets forth Outdoor Recreation segment results:
1998 1997 1996
------ ------ ------
(Dollars in
millions)
Net sales........................................... $711.3 $665.3 $370.2
Percentage increase................................. 6.9% 79.7% 61.6%
Operating earnings.................................. $ 38.5 $ 62.6 $ 38.7
Percentage (decrease) increase...................... (38.5)% 61.8% 0.3%
Operating margin.................................... 5.4% 9.4% 10.5%
Capital expenditures................................ $ 33.3 $ 23.2 $ 12.2
21
The above table includes a $9.2 million strategic charge recorded in 1998
and a $3.4 million strategic charge recorded in 1997. On a pro forma basis,
excluding these charges, the Outdoor Recreation segment results for the years
ended December 31, 1998, 1997 and 1996, were as follows:
1998 1997 1996
----- ----- -----
(Dollars in
millions)
Operating earnings..................................... $47.7 $66.0 $38.7
Percentage (decrease) increase......................... (27.7)% 70.5% 0.3%
Operating margin....................................... 6.7% 9.9% 10.5%
In 1998, Outdoor Recreation segment sales increased 6.9 percent to $711.3
million compared with $665.3 million in 1997. The gain primarily reflects
higher revenues in the bicycle and ice chest and cooler businesses due to
expanded distribution and new products. Offsetting this gain were decreased
sales in the fishing tackle and camping equipment businesses caused by weak
markets for those products, increased competition from Asian imports and
retail inventory reductions.
Operating earnings were $38.5 million in 1998 and $62.6 million in 1997,
including strategic charges of $9.2 million in 1998 and $3.4 million in 1997.
Excluding the strategic charges, operating earnings decreased 27.7 percent in
1998 to $47.7 million from $66.0 million in 1997. Excluding the strategic
charges, operating margins decreased 3.2 points to 6.7 percent in 1998 due to
the aforementioned sales volume declines in camping and fishing products,
product mix changes and increased advertising spending.
The Company continues to focus on cost reductions as well as investment in
new product launches and aggressive marketing activities to improve sales in
the fishing tackle and camping equipment businesses, and to continue expansion
in the bicycle, ice chest and cooler businesses.
Outdoor Recreation segment sales increased $295.1 million to $665.3 million
in 1997, up from $370.2 million in 1996. The gain reflects $327.5 million of
incremental sales contributed by the acquisitions discussed previously, which
were partially offset by softness in demand for bicycle and camping products.
Operating earnings increased 61.8 percent in 1997 to $62.6 million from $38.7
million in 1996. Excluding the strategic charge in 1997, operating earnings
increased 70.5 percent to $66.0 million and operating margins decreased 0.6
points to 9.9 percent due to lower margins experienced in the acquired
businesses, which more than offset integration benefits.
Indoor Recreation Segment
The following table sets forth Indoor Recreation segment results:
1998 1997 1996
------ ------ ------
(Dollars in
millions)
Net sales.......................................... $691.0 $616.9 $515.1
Percentage increase (decrease)..................... 12.0% 19.8% (4.9)%
Operating earnings................................. $ 3.8 $ 54.1 $ 47.4
Percentage (decrease) increase..................... (93.0)% 14.1% 295.0%
Operating margin................................... 0.5% 8.8% 9.2%
Capital expenditures............................... $ 47.9 $ 39.2 $ 40.5
The above table includes a $50.8 million strategic charge recorded in 1998
and a $20.4 million strategic charge recorded in 1997. On a pro forma basis,
excluding these charges, the Indoor Recreation segment results for the years
ended December 31, 1998, 1997 and 1996, were as follows:
1998 1997 1996
----- ----- -----
(Dollars in
millions)
Operating earnings..................................... $54.6 $74.5 $47.4
Percentage (decrease) increase......................... (26.7)% 57.2% 295.0%
Operating margin....................................... 7.9% 12.1% 9.2%
22
Sales for the Indoor Recreation segment increased 12.0 percent to $691.0
million in 1998 compared with $616.9 million in 1997. The gain primarily
reflects the incremental sales contributed by the fitness equipment businesses
acquired in 1998 and 1997 that totaled $118.3 million, along with sales gains
in the fitness equipment business due to increased health club memberships,
strong growth in the European markets and expanded sales in the military,
hospital and school channels. Partially offsetting these gains was a
significant decline in bowling capital equipment sales resulting from the
Asian economic situation.
The Indoor Recreation segment reported operating earnings of $3.8 million
in 1998 compared with $54.1 million in 1997, which includes strategic charges
of $50.8 million in 1998 and $20.4 million in 1997. Excluding the strategic
charges, operating earnings decreased 26.7 percent to $54.6 million in 1998
from $74.5 million in 1997. Operating margins, excluding the strategic
charges, decreased to 7.9 percent in 1998 from 12.1 percent in 1997. The
decline in operating earnings is primarily related to the decrease in bowling
capital equipment sales resulting from the effects of the Asian economic
situation and was partially offset by earnings gains in the fitness equipment
business.
Indoor Recreation segment sales increased $101.8 million or 19.8 percent to
$616.9 million in 1997 from $515.1 million in 1996. This gain reflects $90.0
million of incremental sales contributed by the fitness equipment acquisitions
as well as improved bowling center revenue.
Operating earnings in 1997 were $54.1 million compared with $47.4 million
in 1996. Excluding the $20.4 million strategic charge in 1997, operating
earnings increased 57.2 percent to $74.5 million, and operating margins
improved to 12.1 percent in 1997 from 9.2 percent in 1996. These improvements
reflect the benefits from the fitness equipment business purchased in July
1997 and improved operating efficiencies in the bowling capital equipment
business.
Boat Segment
The following table sets forth Boat segment results:
1998 1997 1996
-------- -------- --------
(Dollars in millions)
Net sales..................................... $1,333.7 $1,229.9 $1,159.5
Percentage increase........................... 8.4% 6.1% 19.9%
Operating earnings............................ $ 112.9 $ 70.0 $ 92.5
Percentage increase (decrease)................ 61.3% (24.3)% 27.6%
Operating margin.............................. 8.5% 5.7% 8.0%
Capital expenditures.......................... $ 48.8 $ 52.4 $ 43.7
The above table includes a $14.1 million strategic charge recorded in 1997.
On a pro forma basis, excluding the 1997 charge, the Boat segment results for
the years ended December 31, 1998, 1997 and 1996, were as follows:
1998 1997 1996
-------- -------- --------
(Dollars in millions)
Operating earnings............................ $ 112.9 $ 84.1 $ 92.5
Percentage increase (decrease)................ 34.2% (9.1)% 27.6%
Operating margin.............................. 8.5% 6.8% 8.0%
In 1998, Boat segment sales increased 8.4 percent to $1,333.7 million
compared with $1,229.9 million in 1997. The gain primarily reflects an
improved sales mix of larger cruisers and yachts. These results were achieved
while generally reducing field inventory levels.
Operating earnings for the Boat segment totaled $112.9 million in 1998
versus $70.0 million in 1997. Operating earnings included a $15.0 million gain
recorded in 1998 relating to a settlement with a boat dealer,
23
MarineMax, Inc., and a $14.1 million strategic charge recorded in 1997.
Excluding these items, the segment's operating earnings were $97.9 million in
1998 compared with $84.1 million in 1997, an increase of 16.4 percent.
Operating margins improved to 7.3 percent in 1998 from 6.8 percent in 1997,
excluding the settlement and strategic charge, as a result of the improved
sales mix of larger, higher margin cruisers and yachts that was partially
offset by increased marketing spending.
In 1997, Boat segment sales increased 6.1 percent to $1,229.9 million, up
from $1,159.5 million in 1996, as the benefits of successful marketing
programs and an improved sales mix of larger cruisers and yachts offset a
decline in sales of small boats. Operating earnings for the Boat segment
totaled $70.0 million in 1997 and $92.5 million in 1996. Excluding the $14.1
million 1997 strategic charge, operating earnings in 1997 were $84.1 million,
a 9.1 percent decrease from prior-year levels. Operating margins, on a pre-
strategic charge basis, declined to 6.8 percent in 1997 from 8.0 percent in
1996, reflecting the effects of lower sales volumes of small boats and new
product start-up costs, along with the expensing of costs for business process
re-engineering efforts performed in connection with systems development
projects.
Marine Engine Segment
The following table sets forth Marine Engine segment results:
1998 1997 1996
-------- -------- --------
(Dollars in millions)
Net sales.................................... $1,482.5 $1,410.8 $1,377.7
Percentage increase (decrease)............... 5.1% 2.4% (1.4)%
Operating earnings........................... $ 222.2 $ 124.3 $ 168.0
Percentage increase (decrease)............... 78.8% (26.0)% 6.9%
Operating margin............................. 15.0% 8.8% 12.2%
Capital expenditures......................... $ 66.4 $ 67.7 $ 61.5
The above table includes a $60.6 million strategic charge recorded in 1997.
On a pro forma basis, excluding the 1997 charge, the Marine Engine segment
results for the years ended December 31, 1998, 1997 and 1996, were as follows:
1998 1997 1996
-------- -------- --------
(Dollars in millions)
Operating earnings........................... $ 222.2 $ 184.9 $ 168.0
Percentage increase.......................... 20.2% 10.1% 6.9%
Operating margin............................. 15.0% 13.1% 12.2%
In 1998, Marine Engine segment sales increased 5.1 percent to $1,482.5
million compared with $1,410.8 million in 1997. This gain primarily reflects
strong consumer demand for new low-emission outboard engines, an improved mix
of sterndrive engines and growth in sales of marine parts and accessories.
Operating earnings were $222.2 million in 1998 and $124.3 million in 1997,
including the $60.6 million strategic charge recorded in 1997. Excluding the
1997 strategic charge, operating earnings in 1998 increased 20.2 percent.
Operating margins were 15.0 percent in 1998 compared with 8.8 percent in 1997,
13.1 percent excluding the charge. The improvement in operating margins
reflects the benefits of cost management initiatives and actions taken in
connection with the 1997 strategic charge, sales growth and an improved sales
mix. These benefits more than offset the higher costs associated with the
introduction of low-emission outboard engines.
In 1997, sales improved 2.4 percent to $1,410.8 million, up from $1,377.7
million in 1996, as a result of increased sales of sterndrive and high-
performance engines and marine parts and accessories. Operating earnings for
the segment, including the $60.6 million strategic charge recorded in 1997,
were $124.3 million in 1997 compared with $168.0 million in 1996. Excluding
the strategic charge, operating earnings in 1997 increased 10.1 percent to
$184.9 million. Operating margins, excluding the strategic charge, increased
0.9 points in 1997 to 13.1 percent, reflecting the benefits of effective cost
management and an improved sales mix.
24
Cash Flow, Liquidity and Capital Resources
Cash generated from operating activities, available cash balances and
selected borrowings are the Company's major sources of funds for investments
and dividend payments. The Company uses its cash balances and other sources of
liquidity to invest in its current businesses to promote innovation and new
product lines and to acquire complementary businesses. These investments,
along with other actions taken to improve the profit margins of current
businesses, are designed to continue improvement in the Company's financial
performance and enhance shareholder value.
Cash and cash equivalents totaled $126.1 million at the end of 1998
compared with $85.6 million in 1997. In 1998, net cash provided by operating
activities of $429.0 million more than offset capital expenditures and other
investing activities which totaled $237.5 million. The Company used this cash,
along with short-term borrowings, to repurchase approximately 8.2 million
shares of common stock for $159.9 million.
Net cash provided by operating activities totaled $429.0 million in 1998,
compared with $261.7 million in 1997 and $395.8 million in 1996. The primary
components of net cash provided by operating activities include the Company's
net earnings adjusted for non-cash revenues and expenses; the timing of cash
flows relating to operating expenses, sales and income taxes; and the
management of inventory levels. The improvement between 1998 and 1997
reflected the favorable timing of income tax payments versus provisions
between years, along with improved working capital cash flows. The Company
also received one-time benefits from a settlement with a boat dealer,
MarineMax, Inc., the favorable settlement of a lawsuit related to the divested
Technical segment and a dividend from an equity investment that together
totaled $40.1 million. The decrease between 1997 and 1996 reflected
investments made in working capital by newly acquired businesses for seasonal
needs and new-product introductions, partially offset by stronger operating
results. Cash spending associated with the strategic charges totaled $34.1
million in 1998 and $16.1 million in 1997.
During 1998, the Company invested $198.0 million in capital expenditures,
compared with $190.5 million in 1997 and $169.9 million in 1996. In 1998,
capital expenditures included $41.6 million related to company-wide systems
upgrade projects, along with continued investments to achieve improved
production efficiencies and product quality, growth from new products and
expansion of existing product lines. In 1998, the Company invested $32.8
million to acquire 12 bowling centers and ParaBody, Inc. multi-station gyms,
benches and racks. The Company invested $515.4 million in 1997 to acquire
various businesses including Igloo coolers and ice chests, Mongoose bicycles,
Hoppe's hunting accessories, Life Fitness and Hammer Strength fitness
equipment and DBA Products bowling lane supplies. In 1996, the Company
invested $360.6 million to acquire various businesses, including Roadmaster
bicycles, American Camper and the Boston Whaler brand of boats. Management
continues to evaluate acquisition opportunities to build the Company's active
recreation business.
Total debt at year end 1998 was $805.5 million versus $754.8 million at the
end of 1997, reflecting increases in short-term commercial paper borrowings.
Debt-to-capitalization ratios were 38.1 percent at December 31, 1998 and 36.5
percent at December 31, 1997.
On October 1, 1998, the Company announced that its Board of Directors had
authorized the repurchase of up to seven million shares of the Company's
outstanding common stock. During the fourth quarter, the Company completed the
seven-million-share repurchase program for $127.7 million. On October 21,
1997, the Company announced a program to repurchase systematically up to five
million shares of its common stock to offset shares the Company expects to
issue under its stock option and other compensation plans. These repurchases
will be funded with cash generated from operations and short-term borrowings,
as required. The Company repurchased 1.2 million and 0.3 million shares for
$32.2 million and $8.4 million in 1998 and 1997, respectively. A total of 3.5
million additional shares may be repurchased under this program, and the
Company anticipates continuing this program in 1999.
The Company's financial flexibility and access to capital markets is
supported by its balance sheet position, investment-grade credit ratings and
ability to generate significant cash from operating activities. The Company
25
has $400 million available under a long-term credit agreement with a group of
banks (see Note 9-Debt). Under the terms of the long-term credit agreement,
the Company has multiple borrowing options, and, if utilized, the borrowing
rate, as calculated in accordance with the terms described in Note 9 to
consolidated financial statements, would have been 5.26 percent at December
31, 1998. The Company also has $150 million available under a universal shelf
registration filed in 1996 with the Securities and Exchange Commission for the
issuance of equity and/or debt securities. Management believes that these
factors provide adequate sources of liquidity to meet its long-term and short-
term needs.
Refer to Note 6 to consolidated financial statements and the Legal
Proceedings section below for disclosure of the potential cash requirements of
legal and environmental proceedings. Additionally, the Company is involved in
the process of litigating certain findings from Federal tax audits for the
years 1990 and 1991 as described in Note 13 to consolidated financial
statements. Should the IRS prevail in these proceedings, the Company may be
required to pay up to $60 million for taxes due, plus accrued interest.
Legal Proceedings
Five lawsuits, more fully described in Note 6 to the consolidated financial
statements, are currently pending wherein it is claimed the Company violated
various provisions of federal and state antitrust and state consumer
protection laws in connection with its sales of MerCruiser sterndrive and
inboard engines and its acquisitions of the Sea Ray and US Marine boat
companies. In June 1998, an adverse verdict was reached in the first of these
suits that was brought by a buying group of boat-builder customers whose
purchases represent less than one-fifth of all direct sales of sterndrive and
inboard engines to boat builders during the damage period relevant to that
action. That verdict and resulting damage judgment of $133.2 million, after
trebling, has been appealed and the Company believes the adverse judgment is
likely to be reversed. Following the verdict, four additional suits have been
filed seeking to rely on the allegations and findings of that verdict. The
first purports to represent a class of all other boat-builder customers and
seeks damages on the same model as the initial suit; the second was brought by
the Company's principal competitor in the sterndrive engine business and
claims damages in an unspecified amount; the third seeks to represent a class
of all dealers that purchased sterndrive or inboard engines or boats equipped
with such engines directly from the Company; and the fourth seeks to represent
indirect purchasers from 17 jurisdictions of boats equipped with such engines.
The Company is currently seeking to stay all of these actions pending the
resolution of the appeal which is not likely to occur prior to the end of
1999. The Company is not presently able to reasonably estimate the ultimate
outcome of these cases, and accordingly, no expense for either the judgment or
related lawsuits has been recorded. If the adverse judgment is sustained after
all appeals, and if the class actions proceed and are successful, the damages
ultimately payable by the Company would have a material adverse affect on the
Company's financial condition and results of operations.
Looking to the Future
The Company's future performance will be influenced by a number of factors.
Revenues and earnings may be affected by changes in domestic and international
market conditions in active recreation, including the effect of economic
conditions in Asia and South America on the Company's businesses. The Company
will emphasize product innovation, line extensions and acquisitions, marketing
initiatives and cost-management efforts to further enhance its financial
performance. The Company will continue to benefit from the acquisitions
completed in 1998, 1997 and 1996.
Capital Expenditures
The Company has budgeted approximately $190 million for capital
expenditures in 1999. In addition to necessary maintenance spending, the
Company's emphasis remains on those projects that deliver innovative new
products and drive manufacturing productivity. The 1999 capital expenditures
budget also includes the continuation of the company-wide information systems
upgrades that were initiated in 1997.
Engine Emissions Regulations
U.S. Environmental Protection Agency (EPA) regulations that were finalized
in 1996 require that certain exhaust emissions from gasoline marine outboard
engines be reduced by 8.3 percent per year for nine years
26
beginning with the 1998 model year. The Company has implemented a plan that
meets the EPA compliance schedule. It includes both modifying automotive fuel-
injection technology for marine use and converting certain two-cycle engines
to four-cycle engines. Both of these technologies yield emission reductions on
the order of 80 percent or better. The Company expects the percentage of low-
emission engine sales to total Marine Engine segment sales to continue to
increase. Costs associated with the introduction of low-emission engines will
continue to have an adverse effect on Marine Engine segment operating margins.
More recently, the California Air Resources Board (CARB) voted to adopt
regulations more stringent than the EPA regulations. These regulations will
bring forward the EPA targeted emissions reductions from 2006 to 2001. This
affects new engines sold in California beginning with the model year 2001,
with further emission reductions scheduled in 2004 and 2008. While the
regulation language is not finalized, the targets established are not likely
to change. The Company believes that its current implementation plan designed
to meet the EPA exhaust emissions regulations will allow the Company to comply
with the more stringent regulations as currently proposed by CARB. However,
product-development costs are likely to be accelerated, which may adversely
affect short-term results.
Year 2000
In January 1998, the Company initiated a formal program to address the Year
2000 issue. The Year 2000 issue involves the inability of date-sensitive
computer applications to process dates beyond the year 2000. The Company has
established a Year 2000 Project Office to lead initiatives that address areas
with the potential of having a major adverse effect on the business.
The Company uses software and related technologies throughout its
businesses and in certain of its products that will be affected by the Year
2000 issue. A comprehensive inventory and assessment of business systems and
processes that may be affected by Year 2000 issues have been substantially
completed. Key areas requiring priority focus are the Company's information
(IT) systems including financial, invoicing, order entry, purchasing, payroll,
inventory management and production management systems along with IT systems
infrastructure, as well as the Company's manufacturing and other non-IT
systems.
The Company is in the process of implementing its plan to address its IT
and non-IT systems that includes a combination of replacement and remediation
activities. This plan is expected to be substantially complete in June 1999.
The Company's IT replacement projects, which are being done in connection with
company-wide IT system upgrade projects, are approximately 65 to 70 percent
complete and include financial and order-processing systems in certain
businesses. The remaining IT systems are being addressed through remediation
efforts, a majority of which have been completed. The Company's testing
activities will include system testing, unit testing and Year 2000 multiple-
date testing. Testing efforts are ongoing, with an expected finish date for
substantially all IT systems in June 1999. Replacement and remediation of non-
IT systems is also ongoing, with a targeted finish date of June 1999 for
substantially all such systems.
An inventory and assessment of the technology incorporated into the
Company's products is substantially complete. Key areas of focus include
bowling products consisting of electronic scorers and bowling center
management systems. The Company is currently taking steps to address these
products on a case-by-case basis. This process is expected to be completed by
June 1999. The Company is assessing the Year 2000 readiness of its critical
customers and suppliers and has sent letters inquiring as to their Year 2000
readiness. The Company will perform additional procedures, which may include
interviews and on-site visits, to evaluate risks associated with third parties
and will consider these risks in establishing its contingency plans.
While the Company believes that its efforts to address the Year 2000 issue
will be successful in avoiding any material adverse effect on the Company's
results of operation or financial condition, given the complexity and number
of potential risks, there can be no guarantee that the Company's efforts will
be successful. The risks to a successful Year 2000 plan include, but are not
limited to, the readiness of customers and suppliers, the availability of
technical resources, and the effectiveness of systems replacement and
remediation programs and product fixes.
27
If the Company's efforts to achieve Year 2000 readiness are unsuccessful,
the impact could have a material adverse effect on the Company's results of
operation and financial condition. The potential adverse effects include a
limited ability to manufacture and distribute products and process daily
business transactions.
The Company is developing contingency plans to mitigate the potential
disruptions that may result from the Year 2000 issue. These plans may include
shifting from replacement to remediation activities for IT systems, securing
alternative sources for key suppliers of materials and services, investing in
safety stocks of key raw materials and finished goods and other measures
considered appropriate by management. Once developed and approved, contingency
plans and the related cost estimates will be continually refined as additional
information becomes available. The Company expects to substantially complete
its contingency plans by April 1999, with implementation as required during
the latter half of 1999.
The costs of remediating existing software and other Year 2000-related
expenses have been determined and are expected to total approximately $15
million to $18 million. The Company has expensed approximately $10 million of
costs since the Year 2000 assessment process began in 1997. The majority of
this amount was expensed in 1998. Costs associated with the company-wide
systems upgrade project, which are included in the Company's capital
expenditures, totaled approximately $41.6 million in 1998 and are expected to
be substantially less in 1999.
The foregoing discussion regarding the Year 2000 project timing,
effectiveness, implementation and costs is based on management's current
evaluation using available information. Factors that might cause material
changes include, but are not limited to, the availability of resources, the
readiness of third parties and the Company's ability to respond to unforeseen
Year 2000 compliance issues.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning June 15, 1999 (March 31, 2000, for the
Company). The Company is assessing the effect of SFAS 133 and currently
believes it will not have a material effect on its earnings or financial
position.
Forward Looking Statements
Certain statements in this Annual Report are forward looking as defined in
the Private Securities Litigation Reform Act of 1995. These statements involve
certain risks and uncertainties that may cause actual results to differ
materially from expectations as of the date of this Report. These risks
include, but are not limited to, the effect of economic conditions in Asia and
South America; the ability to complete planned strategic initiatives in the
time estimated; inventory adjustments by major retailers; competitive pricing
pressures; the success of marketing and cost-management programs; adverse
weather conditions retarding sales of outdoor recreation products; Year 2000
issues including the effectiveness of the Company's remediation and
replacement initiatives, the readiness of third parties including customers
and suppliers and the Company's ability to complete the information systems
initiatives within the time and cost estimated; the outcome of pending
litigation; and shifts in market demand for the Company's products.
Risk Management
The Company is exposed to market risk from changes in foreign currency
exchange rates, interest rates and commodity prices. The Company enters into
various hedging transactions to mitigate these risks in accordance with
guidelines established by the Company's management. The Company does not use
financial instruments for trading or speculative purposes.
The Company uses foreign currency forward and option contracts to manage
foreign exchange exposure related to transactions, assets and liabilities that
are subject to risk from foreign currency rate changes. The
28
Company's principal currency exposures relate to the Taiwanese dollar,
Japanese yen, Canadian dollar, European currencies and the Australian dollar.
Hedging of an asset or liability is accomplished through the use of financial
instruments as the gain or loss on the hedging instrument offsets the gain or
loss on the asset or liability. Hedging of anticipated transactions is
accomplished with financial instruments as the realized gain or loss occurs on
or near the maturity date of the anticipated transaction.
The Company uses interest-rate swap agreements to mitigate the effect of
changes in interest rates on the Company's investments and borrowings. The
Company's net exposure to interest-rate risk primarily consists of fixed-rate
instruments. Interest-rate risk management is accomplished through the use of
interest-rate swaps and floating-rate instruments that are benchmarked to U.S.
and European short-term money market interest rates.
Raw materials used by the Company are exposed to the effect of changing
commodity prices. Accordingly, the Company uses commodity swap agreements to
manage fluctuations in prices of anticipated purchases of certain raw
materials.
The Company uses a value-at-risk (VAR) computation to estimate the maximum
potential one-day reduction in the fair market value of its interest rate-
sensitive financial instruments and to estimate the maximum one-day reduction
in pretax earnings related to its foreign currency, interest rate and
commodity price-sensitive derivative financial instruments. The VAR
computation includes the Company's debt; foreign currency forwards and
options; interest rate swap agreements; and commodity swap agreements.
The amounts shown below represent the estimated potential loss that the
Company could incur from adverse changes in foreign exchange rates, interest
rates or commodity prices using the VAR estimation model. The VAR model uses
the variance-covariance statistical modeling technique and uses historical
foreign exchange rates, interest rates and commodity prices to estimate the
volatility and correlation of these rates and prices in future periods. It
estimates a loss in fair market value using statistical modeling techniques
and includes substantially all market risk exposures. The estimated potential
losses shown in the table below have no effect on the Company's results of
operations or financial condition.
Amount Time Confidence
Risk Category in Millions Period Level
------------- ----------- ------ ----------
Foreign exchange.................................. $0.1 1 day 95%
Interest rates.................................... $5.2 1 day 95%
Commodity prices.................................. $ -- 1 day 95%
The 95 percent confidence level signifies the Company's degree of
confidence that actual losses would not exceed the estimated losses shown
above. The amounts shown disregard the possibility that interest rates,
foreign currency exchange rates and commodity prices could move in the
Company's favor. The VAR model assumes that all movements in rates and
commodity prices will be adverse. Actual experience has shown that gains and
losses tend to offset each other over time, and it is highly unlikely that the
Company could experience losses such as these over an extended period of time.
These amounts should not be considered projections of future losses, since
actual results may differ significantly depending upon activity in the global
financial markets.
29
BRUNSWICK CORPORATION
REPORTS OF MANAGEMENT AND INDEPENDENT PUBLIC ACCOUNTANTS
REPORT OF MANAGEMENT
The Company's management is responsible for the preparation, integrity and
objectivity of the financial statements and other financial information
presented in this report. The financial statements have been prepared in
conformity with generally accepted accounting principles and reflect the
effects of certain estimates and judgments made by management.
The Company's management maintains a system of internal controls that is
designed to provide reasonable assurance, at reasonable cost, that assets are
safeguarded and that transactions and events are recorded properly. The
Company's internal audit program includes periodic reviews of these systems
and controls and compliance therewith.
The Audit and Finance Committee of the Board of Directors, comprised
entirely of outside directors, meets regularly with the independent public
accountants, management and internal auditors to review accounting, reporting
and internal control matters. The Committee has direct and private access to
both the internal and external auditors.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Brunswick Corporation:
We have audited the accompanying consolidated balance sheets of Brunswick
Corporation (a Delaware Corporation) and Subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, cash flows and
shareholders' equity for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brunswick Corporation and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as
whole.
/s/ Arthur Andersen LLP
Chicago, Illinois
January 27, 1999
(except with respect to the matters discussed in Note 6, as to which the dates
are February 10, 1999 and February 16, 1999)
30
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended
December 31
----------------------------
1998 1997 1996
-------- -------- --------
(In millions, except per
share data)
Net sales........................................ $3,945.2 $3,657.4 $3,160.3
Cost of sales.................................... 2,859.1 2,622.4 2,285.0
Cost of sales--strategic charge.................. -- 15.6 --
Selling, general and administrative expense...... 598.4 576.3 484.0
Research and development expense................. 87.5 89.4 86.5
Strategic charges................................ 60.0 82.9 --
-------- -------- --------
Operating earnings........................... 340.2 270.8 304.8
-------- -------- --------
Interest expense................................. (62.7) (51.3) (33.4)
Other income..................................... 6.3 16.7 18.9
-------- -------- --------
Earnings before income taxes................. 283.8 236.2 290.3
Income tax provision............................. 105.2 85.0 104.5
-------- -------- --------
Earnings from continuing operations.......... 178.6 151.2 185.8
Cumulative effect of change in accounting
principle....................................... -- (0.7) --
Gain from discontinued operations................ 7.7 -- --
-------- -------- --------
Net earnings................................. $ 186.3 $ 150.5 $ 185.8
======== ======== ========
Basic earnings per common share
Earnings from continuing operations............ $ 1.82 $ 1.52 $ 1.89
Cumulative effect of change in accounting
principle..................................... -- (.01) --
Gain from discontinued operations.............. .08 -- --
-------- -------- --------
Net earnings................................. $ 1.90 $ 1.52 $ 1.89
======== ======== ========
Average shares used for computation of basic
earnings per share.............................. 98.3 99.2 98.3
Diluted earnings per common share
Earnings from continuing operations............ $ 1.80 $ 1.51 $ 1.88
Cumulative effect of change in accounting
principle..................................... -- (.01) --
Gain from discontinued operations.............. .08 -- --
-------- -------- --------
Net earnings................................. $ 1.88 $ 1.50 $ 1.88
======== ======== ========
Average shares used for computation of diluted
earnings per share.............................. 99.0 100.3 98.8
The notes are an integral part of these consolidated statements.
31
BRUNSWICK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
As of December 31
------------------
1998 1997
-------- --------
(Dollars in
millions,
except per share
data)
Current assets
Cash and cash equivalents, at cost, which approximates
market.................................................... $ 126.1 $ 85.6
Accounts and notes receivable, less allowances of $22.5 and
$20.7..................................................... 420.8 434.9
Inventories
Finished goods............................................ 383.6 313.4
Work-in-process........................................... 141.3 139.4
Raw materials............................................. 120.6 113.5
-------- --------
Net inventories.......................................... 645.5 566.3
-------- --------
Prepaid income taxes....................................... 208.7 210.7
Prepaid expenses........................................... 53.3 46.0
Income tax refunds receivable.............................. -- 22.5
-------- --------
Current assets.......................................... 1,454.4 1,366.0
-------- --------
Property
Land...................................................... 72.0 68.7
Buildings................................................. 412.0 425.8
Equipment................................................. 950.9 830.8
-------- --------
Total land, buildings and equipment...................... 1,434.9 1,325.3
Accumulated depreciation.................................. (699.0) (656.7)
-------- --------
Net land, buildings and equipment........................ 735.9 668.6
Unamortized product tooling costs......................... 109.2 114.4
-------- --------
Net property............................................ 845.1 783.0
-------- --------
Other assets
Goodwill.................................................. 718.9 726.4
Other intangibles......................................... 101.6 115.8
Investments............................................... 71.2 87.5
Other long-term assets.................................... 160.3 162.7
-------- --------
Other assets............................................. 1,052.0 1,092.4
-------- --------
Total assets............................................ $3,351.5 $3,241.4
======== ========
The notes are an integral part of these consolidated statements.
32
BRUNSWICK CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
As of December 31
------------------
1998 1997
-------- --------
(Dollars in
millions,
except per share
data)
Current liabilities
Short-term debt, including current maturities of long-term
debt...................................................... 170.1 109.3
Accounts payable........................................... 286.1 252.9
Accrued expenses........................................... 574.6 586.0
Accrued income taxes....................................... 5.6 --
-------- --------
Current liabilities....................................... 1,036.4 948.2
-------- --------
Long-term debt
Notes, mortgages and debentures........................... 635.4 645.5
-------- --------
Deferred items
Income taxes.............................................. 165.1 144.3
Postretirement and postemployment benefits................ 141.1 137.3
Compensation and other.................................... 62.2 51.1
-------- --------
Deferred items........................................... 368.4 332.7
-------- --------
Common shareholders' equity
Common stock; authorized: 200,000,000 shares, $.75 par
value; issued: 102,538,000 shares......................... 76.9 76.9
Additional paid-in capital................................. 311.5 308.2
Retained earnings.......................................... 1,189.5 1,052.2
Treasury stock, at cost 10,669,000 shares and 3,057,000
shares.................................................... (204.7) (59.0)
Unamortized ESOP expense and other......................... (56.1) (63.1)
Accumulated other comprehensive income..................... (5.8) (0.2)
-------- --------
Common shareholders' equity............................... 1,311.3 1,315.0
-------- --------
Total liabilities and shareholders' equity............. $3,351.5 $3,241.4
======== ========
The notes are an integral part of these consolidated statements.
33
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31
-------------------------
1998 1997 1996
------- ------- -------
(In millions)
Cash flows from operating activities
Net earnings........................................ $ 186.3 $ 150.5 $ 185.8
Depreciation and amortization....................... 159.7 156.9 129.7
Changes in noncash current assets and current
liabilities:
Change in accounts and notes receivable........... 18.4 (57.1) (26.9)
Change in inventories............................. (77.9) (55.6) 24.2
Change in prepaid expenses........................ (7.1) (11.9) 2.4
Change in accounts payable........................ 31.2 25.9 11.7
Change in accrued expenses........................ (41.3) (40.9) 3.6
Income taxes........................................ 59.4 (1.5) 35.2
Dividends received from equity investments.......... 19.0 6.3 24.5
Strategic charges................................... 60.0 98.5 --
Other, net.......................................... 21.3 (9.4) 5.6
------- ------- -------
Net cash provided by operating activities....... 429.0 261.7 395.8
------- ------- -------
Cash flows from investing activities
Acquisitions of businesses.......................... (32.8) (515.4) (360.6)
Unrestricted cash held for acquisition of Igloo
Holdings, Inc...................................... -- 143.0 (143.0)
Capital expenditures................................ (198.0) (190.5) (169.9)
Proceeds from businesses disposed................... -- -- 24.1
Investments in marketable securities................ -- 3.6 7.6
Payments advanced for long-term supply arrangements. (6.5) (12.3) (44.9)
Other, net.......................................... (0.2) 9.1 (12.3)
------- ------- -------
Net cash used for investing activities.......... (237.5) (562.5) (699.0)
------- ------- -------
Cash flows from financing activities
Net proceeds from issuances of short-term commercial
paper and other short-term debt.................... 62.1 94.9 --
Net proceeds from issuances of long-term debt....... -- 198.6 248.2
Payments of long-term debt.......................... (11.4) (107.4) (5.8)
Cash dividends paid................................. (49.0) (49.6) (49.3)
Stock repurchases................................... (159.9) (8.4) --
Stock options exercised............................. 7.2 19.3 4.3
Other, net.......................................... -- 0.5 --
------- ------- -------
Net cash (used for) provided by financing
activities..................................... (151.0) 147.9 197.4
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 40.5 (152.9) (105.8)
Cash and cash equivalents at beginning of year...... 85.6 238.5 344.3
------- ------- -------
Cash and cash equivalents at end of year............ $ 126.1 $ 85.6 $ 238.5
------- ------- -------
Supplemental cash flow disclosures
Interest paid....................................... $ 59.0 $ 44.9 $ 32.7
Income taxes paid, net.............................. 50.6 86.6 69.3
Treasury stock issued for compensation plans and
other.............................................. 17.1 30.6 11.8
The notes are an integral part of these consolidated statements.
34
BRUNSWICK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unamortized Other
Additional ESOP accumulated
Common paid-in Retained Treasury expense comprehensive
stock capital earnings stock and other income Total
------ ---------- -------- -------- ----------- ------------- --------
(Dollars in millions, except per share data)
Balance, December 31,
1995................... $76.9 $299.4 $ 814.8 $ (85.0) $(73.3) $10.3 $1,043.1
----- ------ -------- ------- ------ ----- --------
Comprehensive income
Net earnings........... -- -- 185.8 -- -- -- 185.8
Currency translation
adjustments........... -- -- -- -- -- (2.5) (2.5)
Other comprehensive
income................ -- -- -- -- -- 3.4 3.4
----- ------ -------- ------- ------ ----- --------
Total comprehensive
income--1996.......... -- -- 185.8 -- -- 0.9 186.7
Dividends ($.50 per
common share).......... -- -- (49.3) -- -- -- (49.3)
Compensation plans and
other.................. -- 2.6 -- 9.6 (0.9) -- 11.3
Deferred compensation--
ESOP................... -- -- -- -- 5.9 -- 5.9
----- ------ -------- ------- ------ ----- --------
Balance, December 31,
1996................... $76.9 $302.0 $ 951.3 $ (75.4) $(68.3) $11.2 $1,197.7
----- ------ -------- ------- ------ ----- --------
Comprehensive income
Net earnings........... -- -- 150.5 -- -- -- 150.5
Currency translation
adjustments........... -- -- -- -- -- (11.1) (11.1)
Other comprehensive
income................ -- -- -- -- -- (0.3) (0.3)
----- ------ -------- ------- ------ ----- --------
Total comprehensive
income--1997.......... -- -- 150.5 -- -- (11.4) 139.1
Dividends ($.50 per
common share).......... -- -- (49.6) -- -- -- (49.6)
Compensation plans and
other.................. -- 6.2 -- 24.8 (1.2) -- 29.8
Deferred compensation--
ESOP................... -- -- -- -- 6.4 -- 6.4
Stock repurchased....... -- -- -- (8.4) -- -- (8.4)
----- ------ -------- ------- ------ ----- --------
Balance, December 31,
1997................... $76.9 $308.2 $1,052.2 $ (59.0) $(63.1) $(0.2) $1,315.0
----- ------ -------- ------- ------ ----- --------
Comprehensive income
Net earnings........... -- -- 186.3 -- -- -- 186.3
Currency translation
adjustments........... -- -- -- -- -- (1.1) (1.1)
Other comprehensive
income................ -- -- -- -- -- (4.5) (4.5)
----- ------ -------- ------- ------ ----- --------
Total comprehensive
income--1998.......... -- -- 186.3 -- -- (5.6) 180.7
Stock repurchased....... -- -- -- (159.9) -- -- (159.9)
Dividends ($.50 per
common share).......... -- -- (49.0) -- -- -- (49.0)
Compensation plans and
other.................. -- 3.3 -- 14.2 0.1 -- 17.6
Deferred compensation--
ESOP................... -- -- -- -- 6.9 -- 6.9
----- ------ -------- ------- ------ ----- --------
Balance, December 31,
1998................... $76.9 $311.5 $1,189.5 $(204.7) $(56.1) $(5.8) $1,311.3
===== ====== ======== ======= ====== ===== ========
The notes are an integral part of these consolidated statements.
35
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Principles of consolidation. The Company's consolidated financial
statements include the accounts of its significant domestic and foreign
subsidiaries, after eliminating transactions between Brunswick Corporation and
such subsidiaries. Investments in certain affiliates are reported using the
equity method. Additionally, certain previously reported amounts have been
reclassified to conform with current-year presentations.
Use of estimates in the financial statements. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ from those
estimates.
Cash and cash equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Inventories. Approximately 63 percent of the Company's inventories are
valued at the lower of first-in, first-out (FIFO) cost or market (replacement
cost or net realizable value). Inventories valued at last-in, first-out (LIFO)
cost were $79.1 million and $83.7 million lower than the FIFO cost of
inventories at December 31, 1998 and 1997, respectively. Inventory cost
includes material, labor and manufacturing overhead.
Property. Property, including major improvements and product tooling costs,
is recorded at cost. Maintenance and repair costs are charged against results
of operations as incurred. Depreciation is charged against results of
operations over the estimated service lives of the related assets, principally
using the straight-line method.
Software development costs. The Company expenses all software development
and implementation costs incurred until the Company has determined that the
software will result in probable future economic benefit and management has
committed to funding the project. Once this is determined, external direct
cost of material and services, payroll-related costs of employees working on
the project and related interest costs incurred during the application
development stage are capitalized. These capitalized costs are generally
amortized over periods of up to seven years, beginning when the system is
placed in service. Training costs and costs to re-engineer business processes
are expensed as incurred.
Intangibles. The excess of cost over net assets of businesses acquired is
recorded as goodwill and amortized using the straight-line method over its
estimated useful life, principally 40 years. Accumulated amortization was
$79.9 million and $59.4 million at December 31, 1998 and 1997, respectively.
The costs of other intangible assets are amortized over their expected useful
lives using the straight-line method. Accumulated amortization was $326.2
million and $317.0 million at December 31, 1998 and 1997, respectively.
Long-lived assets. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful lives
of its intangible and other long-lived assets may warrant revision or that the
remaining balance of such assets may not be recoverable. The Company uses an
estimate of the related undiscounted cash flows over the remaining life of the
asset in measuring whether the asset is recoverable.
Advertising and marketing costs. Advertising and marketing costs are
generally expensed as incurred.
Revenue recognition. Revenue from product sales is recognized in accordance
with terms of sale, generally upon shipment to customers. Provisions for
discounts and rebates to customers, warranties, returns and other adjustments
are provided for in the same period the related sales are recorded.
36
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive income. As of January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
The adoption of this Statement had no effect on the Company's net earnings or
shareholders' equity. Accumulated other comprehensive income includes currency
translation adjustments, unrealized gains and losses on investments and
minimum pension liability adjustments.
Change in accounting principle. In 1997, the Company adopted the consensus
reached in the Financial Accounting Standards Board's Emerging Issues Task
Force Issue No. 97-13 requiring that the cost of business process re-
engineering associated with internal-use software development activities be
expensed as incurred. The remaining unamortized portion of previously
capitalized costs for these activities of $1.1 million ($0.7 million after
tax) was written off and reported as a cumulative effect of a change in
accounting principle in 1997.
Derivatives. The Company uses derivative financial instruments to manage
its risk associated with movements in foreign currency exchange rates,
interest rates and commodity prices. These instruments are used in accordance
with guidelines established by the Company's management and are not used for
trading or speculative purposes.
Forward exchange contracts generally are not accounted for as hedges, and
as such, unrealized gains and losses are recognized and included in other
income. When realized, gains and losses are reclassified from other income and
recognized primarily as a component of cost of sales. The interest rate
differential to be paid or received under interest rate swap agreements is
recognized over the lives of the agreements as an adjustment of net earnings.
Under commodity swap agreements, which are accounted for as hedges, the
Company receives or makes payments based on the differential between a
specified price and the market price of the commodity. The Company records the
payments when received or made against cost of sales and does not have a
carrying value recorded.
The Company has terminated financial instruments in the past as a result of
a change in the volume or characteristics of the transaction being hedged. If,
subsequent to entering into a forward contract the underlying transaction is
no longer likely to occur, the Company may terminate the forward contract and
any gain or loss on the terminated contract is included in net earnings. Gains
and losses on commodity swaps that are terminated prior to the execution of
the inventory purchase are recorded in inventory until the inventory is sold.
Gains and losses on terminated interest rate swap agreements are recognized or
deferred, as appropriate.
2. Earnings per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which requires
presentation of basic and diluted earnings per common share. There is no
difference in the earnings used to compute the Company's basic and diluted
earnings per share. The difference in the average shares of common stock
outstanding used to compute basic and diluted earnings per share is caused by
potential common stock relating to employee stock options. The average shares
of potential common stock was 0.7 million, 1.1 million and 0.5 million in
1998, 1997 and 1996, respectively.
3. Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information,"
effective December 31, 1998. Adoption of this Statement required the Company
to change the disclosure of operating segment information, but did not require
significant changes in the way geographic information was disclosed.
37
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is a multinational marketer and manufacturer of branded
consumer products designed for outdoor and indoor active recreation
participants, primarily in fishing, camping, biking, bowling, billiards,
fitness equipment and pleasure boating. The Company reports in four operating
segments: Outdoor Recreation, Indoor Recreation, Boat and Marine Engine.
Within the Outdoor Recreation segment, the Company manufactures and markets
fishing products, including fishing reels and reel/rod combinations, trolling
motors and other fishing accessories; camping products, including tents,
sleeping bags, backpacks, cookware and other accessories; a complete line of
ice chests, beverage coolers and thermoelectric products; bicycles and hunting
accessories. These products are primarily manufactured in plants throughout
the United States and, in some cases, sourced from or manufactured in foreign
locations. Fishing, camping, and cooler products and bicycles are
predominantly sold in the United States and are distributed primarily through
mass merchants, sporting goods stores and specialty shops. One mass merchant
customer comprised 43 percent, 37 percent and 34 percent of the segment's
sales in 1998, 1997 and 1996, respectively.
Within the Indoor Recreation segment, the Company manufactures and markets
fitness equipment including treadmills, cross-training equipment, stationary
bikes and weight training equipment; bowling capital equipment, including
lanes, pinsetters, and automatic scorers; bowling balls and other accessories;
and billiards tables and accessories; and operates bowling and family
entertainment centers. These products are primarily manufactured in plants
throughout the United States and, in some cases, sourced from or manufactured
in foreign locations. Bowling balls and billiards equipment are predominantly
sold in the United States and are distributed primarily through mass
merchants, sporting goods stores and specialty shops. Bowling capital
equipment is sold through a direct sales force into the United States and
foreign markets, primarily Europe and Asia. Fitness equipment is sold
primarily in the United States and Europe to health clubs, military,
government, corporate and university facilities and high-end consumer markets.
The Boat segment includes a complete line of pleasure boats including
runabouts, cruisers, yachts, high-performance boats and offshore fishing
boats, which are marketed through dealers. The segment's boat plants are
located in the United States and sales are primarily in the United States.
The Marine Engine segment manufactures outboard, sterndrive and inboard
engines, and marine parts and accessories, which are sold directly to boat
builders or through dealers worldwide. The Company's engine manufacturing
plants are located primarily in the United States. Marine Engine sales are
primarily in the United States.
Information as to the operations of the Company's four operating segments
is set forth below:
Operating Segments
Assets of continuing
Sales to customers Operating earnings operations
---------------------------- ---------------------- --------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- -------- -------- ------ ------ ------ -------- -------- --------
(In millions)
Outdoor Recreation...... $ 711.3 $ 665.3 $ 370.2 $ 38.5 $ 62.6 $ 38.7 $ 850.8 $ 794.7 $ 521.6
Indoor Recreation....... 691.0 616.9 515.1 3.8 54.1 47.4 759.9 726.1 305.2
Boat.................... 1,333.7 1,229.9 1,159.5 112.9 70.0 92.5 567.4 579.1 563.4
Marine Engine........... 1,482.5 1,410.8 1,377.7 222.2 124.3 168.0 669.0 628.0 631.9
Corporate/other......... (273.3) (265.5) (262.2) (37.2) (40.2) (41.8) 504.4 513.5 780.3
-------- -------- -------- ------ ------ ------ -------- -------- --------
Total.................. $3,945.2 $3,657.4 $3,160.3 $340.2 $270.8 $304.8 $3,351.5 $3,241.4 $2,802.4
======== ======== ======== ====== ====== ====== ======== ======== ========
38
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation Research &
Capital expenditures & amortization development expense
-------------------- -------------------- --------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------ ------ ------ ------
(In millions)
Outdoor Recreation...... $ 33.3 $ 23.2 $ 12.2 $ 24.3 $ 24.2 $ 10.1 $ 3.6 $ 3.3 $ 2.6
Indoor Recreation....... 47.9 39.2 40.5 38.0 27.8 21.9 16.6 11.2 8.5
Boat.................... 48.8 52.4 43.7 46.1 52.1 48.0 17.6 15.3 15.3
Marine Engine........... 66.4 67.7 61.5 49.8 50.4 47.3 49.7 59.6 60.1
Corporate............... 1.6 8.0 12.0 1.5 2.4 2.4 -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total.................. $198.0 $190.5 $169.9 $159.7 $156.9 $129.7 $ 87.5 $ 89.4 $ 86.5
====== ====== ====== ====== ====== ====== ====== ====== ======
Geographic Segments
Assets of continuing
Sales to customers operations
-------------------------- --------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
(In millions)
United States............. $3,138.4 $2,794.3 $2,376.1 $2,562.5 $2,456.7 $1,799.2
Foreign................... 806.8 863.1 784.2 284.6 271.2 222.9
Corporate................. -- -- -- 504.4 513.5 780.3
-------- -------- -------- -------- -------- --------
Total.................... $3,945.2 $3,657.4 $3,160.3 $3,351.5 $3,241.4 $2,802.4
======== ======== ======== ======== ======== ========
The Company evaluates performance based on several factors, of which the
primary financial measure is business segment operating earnings. Operating
earnings of segments do not include the expenses of corporate administration,
other expenses and income of a non-operating nature, and provisions for income
taxes. Corporate assets consist primarily of cash and marketable securities,
prepaid income taxes, pension assets and investments in unconsolidated
affiliates. The 1998 operating earnings of the Outdoor Recreation and Indoor
Recreation segments include a strategic charge of $9.2 million and $50.8
million, respectively. The 1998 Boat segment operating earnings include a
$15.0 million gain from a settlement with a boat dealer, MarineMax, Inc. The
1997 operating earnings of the Outdoor Recreation, Indoor Recreation, Boat and
Marine Engine segments include a strategic charge of $3.4 million, $20.4
million, $14.1 million and $60.6 million, respectively.
4. Strategic Charges
During the third quarter of 1998, the Company recorded a pretax charge of
$60.0 million ($41.4 million after tax) in the Indoor and Outdoor Recreation
segments to cover costs associated with strategic initiatives designed to
streamline operations and enhance operating efficiencies in response to the
effect of the economic situation in Asia and other emerging markets on its
businesses. These strategic actions included exiting and disposing of 15
retail bowling centers in Asia, Brazil and Europe; rationalizing manufacturing
of bowling equipment, including closing a pinsetter manufacturing plant in
China, accelerating the shutdown of a pinsetter manufacturing plant in Germany
and exiting the manufacture of electronic scorers and components; closing
bowling sales offices and administrative offices in four countries; and
rationalizing the manufacture and distribution of outdoor recreation products
including the consolidation of certain North American manufacturing operations
and closing seven domestic distribution warehouses. These actions were
substantially completed during 1998.
The components of the 1998 strategic charge include lease termination
costs, severance costs, other incremental costs and asset disposition costs.
Lease termination costs of $11.3 million consist primarily of costs to exit
leased international bowling facilities as well as distribution and warehouse
facilities of the Outdoor Recreation segment. Severance costs of $10.6 million
relate to the termination of approximately 750 employees in the Company's
bowling businesses and 330 employees in the Company's Outdoor Recreation
segment. During
39
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998, the Company completed approximately 68 percent of the severance actions.
Other incremental costs of $9.3 million include contract termination costs
related to the manufacture and sale of bowling equipment; cleanup, holding and
shutdown costs related to the closing of domestic distribution warehouses and
manufacturing facilities; and legal costs. Asset disposition costs of $28.8
million primarily relate to the write-down of facilities and equipment at
international bowling centers in the Indoor Recreation segment and
manufacturing facilities in the Outdoor Recreation segment. As of December 31
and September 30, 1998, these assets had a gross carrying value of
approximately $29.3 million and $35.2 million, respectively. The Company plans
to complete the sale of these assets in 1999, and as of December 31 and
September 30, 1998, the estimated sales value of these assets, net of related
costs to sell, was $4.6 million and $6.4 million, respectively.
During the third quarter of 1997, the Company announced strategic
initiatives to streamline its operations and improve global manufacturing
costs. The initiatives included terminating development efforts on a line of
personal watercraft; closing boat plant manufacturing facilities in Ireland
and Oklahoma; centralizing European marketing and customer service in the
Marine Engine segment; rationalizing manufacturing of bowling equipment
including the shutdown of a pinsetter manufacturing plant in Germany and
outsourcing the manufacture of certain components in the Company's bowling
division; consolidating fishing reel manufacturing; and other actions directed
at manufacturing rationalization, product profitability improvements and
general and administrative expense efficiencies. These actions were
substantially completed during 1998.
In the third quarter of 1997, the Company recorded a pretax charge of $98.5
million ($63.0 million after tax) to cover exit costs related to these
actions. The charge consisted of $3.4 million recorded in the Outdoor
Recreation segment, $20.4 million recorded in the Indoor Recreation segment,
$14.1 million recorded in the Boat segment, and $60.6 million recorded in the
Marine Engine segment.
These actions included termination of approximately 900 hourly and salaried
employees and severance and related benefits totaling $32.6 million. During
1998, the Company substantially completed the severance actions of both hourly
and salaried employees. Asset disposition costs consist of the write-down of
facilities and equipment related to the development of a line of personal
watercraft, boat manufacturing facilities in Ireland and Oklahoma and an
international pinsetter plant. As of December 31, 1998 and September 30, 1997,
these assets had a gross carrying value of approximately $11.6 million and
$30.1 million, respectively, with an estimated sales value approximating the
related cost to sell at December 31, 1998, and an estimated sales value less
cost to sell of $3.7 million as of September 30, 1997. The Company plans to
complete the sale of these assets in 1999. Product and inventory writedowns
related to exit activities were $15.6 million. Other incremental costs related
to exit activities were $23.9 million.
The Company's accrued expense balances relating to the 1998 and 1997
strategic charges as of December 31, 1998 and 1997, were as follows (in
millions):
1997 1998
------------------------------- -------------------------------
Strategic Strategic
Charge Spending December 31, Charge Spending December 31,
--------- -------- ------------ --------- -------- ------------
Severance............... $32.6 $ (9.4) $23.2 $10.6 $(17.7) $16.1
Lease termination....... -- -- -- 11.3 (0.7) 10.6
Other incremental costs. 23.9 (6.7) 17.2 9.3 (15.7) 10.8
----- ------ ----- ----- ------ -----
Total................. $56.5 $(16.1) $40.4 $31.2 $(34.1) $37.5
===== ====== ===== ===== ====== =====
5. Acquisitions
On January 3, 1997, the Company acquired the stock of Igloo Holdings, Inc.,
the leading manufacturer and marketer of coolers and ice chests, for
approximately $152.1 million in cash, which included $9.8 million paid
40
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to certain management employees under stock option arrangements that existed
prior to acquisition. On April 28, 1997, the Company purchased for
approximately $20.9 million the inventory and trademarks of the Mongoose
bicycle and parts business of Bell Sports Corporation. These operations have
been included as part of the Outdoor Recreation segment.
On July 9, 1997, the Company purchased substantially all of the facilities,
equipment, inventory and other assets of Life Fitness, a designer,
manufacturer and marketer of the leading global brand of computerized
cardiovascular and strength training fitness equipment for commercial use. The
purchase price was approximately $314.9 million after post-closing
adjustments, of which $12.8 million has been deferred pursuant to an incentive
compensation plan in connection with the waiver of employee stock options
granted by Life Fitness. Life Fitness has been included as part of the Indoor
Recreation segment.
In January 1997, the Company received an $8.2 million payment from
Roadmaster Industries, Inc. in settlement of the final purchase price
adjustment on the bicycle business purchased in September 1996, which reduced
the final cash consideration paid for the business to $190.2 million.
Roadmaster has been included as part of the Outdoor Recreation segment. Other
acquisitions in 1996 included the purchase of the Nelson/Weather-Rite camping
division (now American Camper) of Roadmaster Industries, Inc. on March 8,
1996, for $119.2 million and the Boston Whaler brand of boats from Meridian
Sports on May 31, 1996, for $26.6 million. American Camper and Boston Whaler
have been included in the Outdoor Recreation and Boat segments, respectively.
Cash consideration paid for other acquisitions totaled $32.8 million in 1998,
$48.5 million in 1997 and $16.4 million in 1996.
The acquisitions were accounted for as purchases and resulted in goodwill
of $10.7 million, $388.5 million and $241.6 million in 1998, 1997 and 1996,
respectively, that will be amortized using the straight-line method over its
estimated useful life, principally 40 years. The assets and liabilities of the
acquired companies have been recorded in the Company's consolidated financial
statements at their estimated fair values at the acquisition dates. The
operating results of each acquisition are included in the Company's results of
operations since the date of acquisition.
6. Commitments and Contingencies
Financial Commitments. The Company has entered into agreements, which are
customary in the marine industry, that provide for the repurchase of its
products from a financial institution in the event of repossession upon a
dealer's default. Repurchases and losses incurred under these agreements have
not had, and are not expected to have, a significant effect on the Company's
results of operations. The maximum potential repurchase commitments at
December 31, 1998 and 1997, were approximately $179.0 million and $221.0
million, respectively.
The Company also has various agreements with financial institutions that
provide limited recourse on marine and bowling capital equipment sales.
Recourse losses have not had, and are not expected to have, a significant
effect on the Company's results of operations. The maximum potential recourse
liabilities outstanding under these programs at December 31, 1998 and 1997,
were approximately $44.0 million and $42.0 million, respectively.
The Company had outstanding standby letters of credit and financial
guarantees of approximately $174.0 million and $25.0 million at December 31,
1998 and 1997, respectively, representing conditional commitments whereby the
Company guarantees performance to a third party. This increase is primarily
attributable to a $133.2 million surety bond issued in 1998 to secure damages
awarded in a jury verdict in a suit brought in December 1995 by Independent
Boat Builders, Inc. while the Company pursues its appeal of the entry of
judgment on the adverse verdict as further discussed below.
41
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The majority of the remaining commitments includes guarantees of premium
payment under certain of the Company's insurance programs and other guarantees
issued in the ordinary course of business.
Legal and Environmental. The Company is subject to certain legal and
environmental proceedings and claims which have arisen in the ordinary course
of its business.
On June 19, 1998, a jury awarded $44.4 million in damages in a suit brought
in December 1995 by Independent Boat Builders, Inc., a buying group of boat
manufacturers and 22 of its members. The lawsuit, Concord Boat Corporation, et
al. v. Brunswick Corporation (Concord), was filed in the United States
District Court for the Eastern District of Arkansas, and alleged that the
Company unlawfully monopolized, unreasonably restrained trade in, and made
acquisitions that substantially lessened competition in the market for
sterndrive and inboard marine engines in the United States and Canada. Under
the antitrust laws, the damage award has been trebled, and plaintiffs will be
entitled to their attorneys' fees and interest. Under current law, any and all
amounts paid by the Company will be deductible for tax purposes.
The trial court judge denied the Company's post-trial motions seeking to
set aside the verdict and for a new trial. The judge also denied all forms of
equitable relief sought by the plaintiffs in connection with the jury verdict,
including their requests for divestiture of the Company's principal boat
manufacturing operations and orders precluding the Company from implementing
various marketing and pricing programs and from acquiring other marine-related
companies or assets. The judge granted the Company's motion for judgment as a
matter of law on its counterclaim which asserted a per se violation of the
antitrust laws by a group of six of the plaintiffs and awarded nominal
damages. Plaintiffs dismissed, voluntarily, two related claims which had
alleged that the Company attempted to monopolize the outboard engine and
sterndrive boat markets.
On November 4, 1998, the Company filed an appeal contending the Concord
verdict was erroneous as a matter of law, both as to liability and damages.
Plaintiffs filed a cross appeal on the denial of equitable relief and on the
judgment against certain of them on the counterclaim. The Company is not
presently able to reasonably estimate the ultimate outcome of this case, and
accordingly, no expense for this judgment has been recorded. If the adverse
judgment is sustained after all appeals, satisfaction of the judgment is
likely to have a material adverse effect on the Company's results of
operations for a particular year, but is not expected to have a material
adverse effect on the Company's financial condition.
On October 23, 1998, a suit was filed in the United States District Court
for the District of Minnesota by two independent boat builders alleging
antitrust violations by the Company in the sterndrive and inboard engine
business, seeking to rely on both the liability and damage findings of the
Concord litigation. This suit originally was entitled Alumacraft Boats Co., et
al. v. Brunswick Corporation, but Alumacraft Boats Co. was dismissed without
prejudice shortly after the suit was filed. Now captioned KK Motors, et al. v.
Brunswick Corporation (KK Motors), the named plaintiffs also seek to represent
a class of all allegedly similarly situated boat builders whose claims have
not been resolved in Concord or in other judicial proceedings. Sales of
sterndrive and inboard marine engines to the Concord plaintiffs are estimated
to have represented less than one-fifth of the total sold to independent boat
builders during the six-and-one-half year time period for which damages were
awarded in that suit. The complaint in the KK Motors case seeks damages for a
time period covering slightly less than four years.
On December 23, 1998, Volvo Penta of the Americas, Inc., Brunswick's
principal competitor in the sale of sterndrive marine engines, filed suit in
the United States District Court for the Eastern District of Virginia. That
suit, Volvo Penta of the Americas v. Brunswick Corporation (Volvo), also
invokes the antitrust allegations of the Concord action and seeks injunctive
relief and damages in an unspecified amount for an unspecified time period.
42
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 10, 1999, a former dealer of Brunswick boats filed suit in the
United States District Court for the District of Minnesota, also seeking to
rely on the liability findings of the Concord action. This suit, Amo Marine
Products, Inc. v. Brunswick Corporation (Amo) seeks class status purporting to
represent all marine dealers who purchased directly from Brunswick sterndrive
or inboard engines or boats equipped with sterndrive or inboard engines during
the period January 1, 1986 to June 30, 1998. Sales by Brunswick of boats
equipped with sterndrive or inboard engines to dealers accounted for less than
half of such engines produced during the time period covered by the complaint;
sales of such engines directly to dealers were de minimis. The complaint seeks
damages in an unspecified amount and requests injunctive relief.
On February 16, 1999, a suit was filed in the Circuit Court of Washington
County, Tennessee, by an individual claiming that the same conduct challenged
in the Concord action violated various antitrust and consumer protection laws
of 16 states and the District of Columbia. In that suit, Couch v. Brunswick
(Couch), plaintiff seeks to reprsent all indirect purchasers in those states
of boats equipped with Brunswick sterndrive or inboard engines. The plaintiff
claims damages in an unspecified amount during the period from 1986 to the
filing of the complaint and also requests injunctive relief.
It is possible that additional suits will be filed, in either federal or
state court, asserting allegations similar to those in the existing complaints
and purporting to represent similar or overlapping classes of claimants.
The Company has answered or will answer each of these new complaints
denying liability and asserting various defenses. In addition, the Company has
filed or will file motions to stay all proceedings in each of these matters
pending the resolution of the appeal in the Concord action because it believes
that an appellate decision in that matter is likely to have an impact on each
of these recently filed actions. In the KK Motors case, the court has granted
a stay of all proceedings on the merits of plaintiffs' claims, but has allowed
the case to proceed on class certification and certain procedural matters. No
other stay motions have yet been ruled on.
Because litigation is subject to many uncertainties, the Company is unable
to predict the outcome of any of the above referenced actions. While there can
be no assurance, the Company believes the adverse judgment in the Concord case
is likely to be reversed on appeal and that any such reversal will have an
impact on all related actions. If the Concord judgment is sustained after all
appeals, however, and if the KK Motors and/or Amo cases successfully proceed
as class actions on behalf of all described potential claimants substantially
as alleged, and if plaintiffs are successful, the damages ultimately payable
by the Company would have a material adverse effect on the Company's financial
condition and results of operations. The Company is unable at this time to
assess the magnitude of damages that either Volvo or the Couch plaintiffs
might assert. Because of a variety of factors affecting both the likelihood
and size of any damage award to these or any other potential claimants, the
Company is unable to estimate the range, amount or timing of its overall
possible exposure.
The Federal Trade Commission (FTC) began an investigation in 1997 of
certain of the Company's marketing practices related to the sale of sterndrive
marine engines to boat builders and dealers. The Company believes such
practices were lawful; however, they were discontinued for business reasons
prior to the initiation of the FTC's investigation.
The Company is involved in certain legal and administrative proceedings
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 and other federal and state legislation governing the generation and
disposition of certain hazardous wastes. These proceedings, which involve both
on- and off-site waste disposal, in many instances seek compensation from the
Company as a waste generator under Superfund legislation, which authorizes
action regardless of fault, legality of original disposition or ownership of a
disposal site.
43
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is involved in numerous environmental remediation and clean-up
projects with an aggregate estimated range of exposure of approximately $21
million to $42 million as of December 31, 1998. At December 31, 1998 and 1997,
the Company had reserves for environmental liabilities of $26.2 million and
$26.3 million, and environmental provisions of $7.3 million, $4.4 million and
$6.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company accrues for environmental remediation-related
activities for which commitments or clean-up plans have been developed and for
which costs can be reasonably estimated. All accrued amounts are generally
determined in coordination with third-party experts on an undiscounted basis
and do not consider recoveries from third parties until such recoveries are
realized. In light of existing reserves, the Company's environmental claims,
including those discussed, when finally resolved, will not, in the opinion of
management, have a material adverse effect on the Company's consolidated
financial position and results of operations.
7. Financial Instruments
The Company enters into various financial instruments in the normal course
of business and in connection with the management of its assets and
liabilities. The Company does not hold or issue financial instruments for
trading or speculative purposes. The Company prepares periodic analyses of its
positions in derivatives to assess the current and projected status of these
agreements. The Company monitors and controls market risk from financial
instrument activities by utilizing floating rates that historically have moved
in tandem with each other, matching positions and limiting the terms of
contracts to short durations. The effect of financial instruments transactions
is not material to the Company's results of operations.
The carrying values of the Company's short-term financial instruments,
including cash and cash equivalents, accounts and notes receivable and short-
term debt, approximate their fair values because of the short maturity of
these instruments. At December 31, 1998 and 1997, the fair value of the
Company's long-term debt was $622.7 million and $664.2 million, respectively,
as estimated using quoted market prices or discounted cash flows based on
market rates for similar types of debt. The fair market value of derivative
financial instruments is determined through dealer quotes and may not be
representative of the actual gains or losses that will be recorded when these
instruments mature due to the volatility of the markets in which they are
traded.
Forward Exchange Contracts. The Company enters into forward exchange
contracts and options to manage foreign exchange exposure related to
transactions, assets and liabilities that are subject to risk from foreign
currency rate changes. These include product costs, revenues and expenses;
associated receivables and payables; intercompany obligations and receivables;
and other related cash flows. Forward exchange contracts outstanding at
December 31, 1998 and 1997, had contract values of $58.0 million and $106.4
million, respectively. The contracts outstanding at December 31, 1998, mature
during 1999 and relate primarily to the German mark and Australian dollar. At
December 31, 1998 and 1997, the fair value of forward exchange contracts was
approximately $0.5 million and $3.3 million, respectively.
Interest Rate Swaps. The Company has entered into interest rate swap
agreements to reduce the impact of changes in interest rates on the Company's
investments and borrowings. At December 31, 1998 and 1997, the Company had
three outstanding floating-to-floating interest-rate swap agreements, each
with a notional principal amount of $260.0 million, that expire in September
2003. The estimated aggregate market value of these three agreements was a
loss of $0.2 million and a gain of $3.9 million at December 31, 1998 and 1997,
respectively, and represents the costs to settle outstanding agreements.
Commodity Swaps. The Company uses commodity swap agreements to hedge
anticipated purchases of raw materials. Commodity swap contracts outstanding
at December 31, 1998 and 1997, had notional values of $21.3 million and $23.4
million, respectively. At December 31, 1998 and 1997, the fair value of these
swap contracts was a net loss of $3.3 million and $0.3 million, respectively.
The contracts outstanding at December 31, 1998, mature through 2000.
44
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Risk. The Company enters into financial instruments with banks and
investment firms with which the Company has continuing business relationships
and regularly monitors the credit ratings of its counterparties. The Company
sells a broad range of active recreation products to a worldwide customer base
and extends credit to its customers based upon an ongoing credit evaluation
program and security is obtained if required. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base; however, periodic
concentrations can occur due to the seasonality of the Company's businesses.
The Company has one mass merchant customer that comprised 12 percent and 10
percent of its net receivable balances at December 31, 1998 and 1997,
respectively.
8. Accrued Expenses
Accrued expenses at December 31 were as follows:
1998 1997
------ ------
(In millions)
Payroll and other compensation................................ $109.9 $121.6
Dealer allowances and discounts............................... 103.0 84.5
Product warranties............................................ 101.0 98.6
Insurance reserves............................................ 60.1 53.9
Strategic charge reserve...................................... 37.5 40.4
Other......................................................... 163.1 187.0
------ ------
Accrued expenses............................................ $574.6 $586.0
====== ======
9. Debt
Short-term debt at December 31 consisted of the following:
1998 1997
------ ------
(In millions)
Commercial paper.............................................. $156.3 $ 86.3
Notes payable................................................. -- 7.9
Current maturities of long-term debt.......................... 13.8 15.1
------ ------
Short-term debt............................................... $170.1 $109.3
====== ======
The weighted-average interest rate for commercial paper borrowings during
1998 and 1997 was 5.74 percent and 5.83 percent, respectively.
45
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt at December 31 consisted of the following:
1998 1997
------ ------
(In millions)
Mortgage notes and other, 4.96% to 9.5% payable through
2003...................................................... $ 29.1 $ 34.0
Notes, 6.75% due 2006, net of discount of $1.7 and $1.9.... 248.3 248.1
Notes, 7.125% due 2027, net of discount of $1.3 and $1.4... 198.7 198.6
Debentures, 7.375% due 2023, net of discount of $0.8....... 124.2 124.2
Guaranteed ESOP debt, 8.13% payable through 2004........... 48.9 55.7
------ ------
649.2 660.6
------ ------
Current maturities......................................... (13.8) (15.1)
------ ------
Long-term debt............................................. $635.4 $645.5
------ ------
Scheduled maturities
2000..................................................... $ 8.6
2001..................................................... 10.8
2002..................................................... 9.5
2003..................................................... 10.2
Thereafter................................................. 596.3
------
Total.................................................. $635.4
======
The Company has a $400.0 million long-term revolving credit agreement with
a group of banks, of which $40.0 million terminates on May 22, 2002, and
$360.0 million terminates on May 22, 2003. Under terms of the agreement, the
Company has multiple borrowing options, including borrowing at the greater of
the prime rate as announced by The Chase Manhattan Bank or the federal funds
effective rate plus 0.5 percent, or a rate tied to the Eurodollar rate. The
Company pays a facility fee of 0.08 percent per annum. Under the terms of the
agreement, the Company is subject to a leverage test, as well as a restriction
on secured debt. The Company was in compliance with these covenants at
December 31, 1998. There were no borrowings under the revolving credit
agreement during 1998, and the agreement continues to serve as support for
commercial paper borrowings when commercial paper is outstanding.
On August 4, 1997, the Company sold $200.0 million of 7.125 percent notes
due August 1, 2027. The proceeds from the sale of the notes were used to
retire a portion of the commercial paper issued to finance the acquisition of
Life Fitness. On December 10, 1996, the Company sold $250.0 million of 6.75
percent notes due December 15, 2006. The proceeds from the sale of the notes
were used to finance the purchase of Igloo Holdings, Inc. on January 3, 1997,
and to repay the $100.0 million principal amount of 8.125 percent notes due
April 1, 1997.
10. Discontinued Operations
In April 1995, the Company completed the sale of substantially all its
Technical Group assets, which were in the discontinued Technical segment, with
the final disposition of remaining assets occurring in June 1996. Certain
liabilities of the discontinued operations were retained by the Company.
During 1998, the Company recognized $7.7 million of after-tax income from
discontinued operations resulting primarily from the favorable cash settlement
of a lawsuit brought by the Company related to the previously disposed
Technical segment.
46
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Stock Plans and Management Compensation
Under the 1991 Stock Plan, the Company may grant stock options, stock
appreciation rights, restricted stock and other various types of awards to
executives and other management employees. Issuances under the plan may be
from either authorized, but unissued shares or treasury shares. The plan
provides for the issuance of a maximum of 11,200,000 shares. The option price
per share has not been less than the fair market value at the date of grant.
The stock options are generally exercisable over a period of 10 years, or as
determined by the Human Resource and Compensation Committee of the Board of
Directors. Options vest over three or five years, although the Company
provides for accelerated vesting should certain earnings per share or stock
price levels be attained, or immediately in the event of a change in control.
The Company has additional stock and stock option plans to provide for
compensation of nonemployee directors. Stock option activity for all plans for
the three years ending December 31, 1998, was as follows:
1998 1997 1996
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Stock average Stock average Stock average
options exercise options exercise options exercise
outstanding price outstanding price outstanding price
----------- -------- ----------- -------- ----------- --------
(Options and shares in thousands)
Outstanding on January
1,..................... 6,498 $22.89 6,016 $19.51 3,380 $17.67
Granted................. 1,326 $20.53 1,752 $31.30 3,082 $21.41
Exercised............... (381) $18.92 (1,099) $17.92 (262) $16.33
Forfeited............... (215) $25.53 (171) $21.72 (184) $22.18
----- ------ ------ ------ ----- ------
Outstanding on December
31,.................... 7,228 $22.62 6,498 $22.89 6,016 $19.51
----- ------ ------ ------ ----- ------
Exercisable on December
31,.................... 3,776 $20.83 3,759 $20.71 2,036 $17.08
----- ------ ------ ------ ----- ------
Shares available on
December 31,
for options that may be
granted................ 1,464 2,687 4,272
The following table summarizes information about stock options outstanding
at December 31, 1998:
Options outstanding Options exercisable
------------------------------------------- --------------------------
Range of Weighted Weighted Weighted
exercise Number average average Number average
price outstanding contractual life exercise price exercisable exercise price
-------- ----------- ---------------- -------------- ----------- --------------
(Options in thousands)
$12.56 to 16.75......... 608 3.8 years $15.42 586 $15.48
$16.75 to 20.25......... 3,458 7.6 years $19.24 1,853 $18.98
$20.25 to 25.50......... 1,538 7.1 years $23.43 967 $23.37
$25.51 to 35.44......... 1,624 8.6 years $31.75 370 $31.99
47
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company adopted the disclosure-only provision under Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-
Based Compensation," as of December 31, 1996, while continuing to measure
compensation cost under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." If the accounting provisions of SFAS No. 123 had been adopted over
the last three years, the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
1998 1997 1996
------------ ------------ ------------
(In millions, except per share data)
Earnings from continuing
operations
As reported..................... $ 178.6 $ 151.2 $ 185.8
Pro forma....................... 172.1 141.3 180.6
Basic earnings per common share
from continuing operations
As reported..................... $ 1.82 $ 1.52 $ 1.89
Pro forma....................... 1.75 1.42 1.84
Diluted earnings per common share
from continuing operations
As reported..................... $ 1.80 $ 1.51 $ 1.88
Pro forma....................... 1.74 1.41 1.83
The weighted-average fair value of individual options granted during 1998,
1997 and 1996 was $5.62, $9.51 and $6.63, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for 1998,
1997 and 1996, respectively:
1998 1997 1996
------- ------- -------
Risk-free interest rate.............................. 5.5% 6.0% 5.9%
Dividend yield....................................... 2.5% 1.6% 2.3%
Volatility factor.................................... 28.7% 27.3% 32.4%
Weighted-average expected life....................... 5 years 5 years 5 years
The Company maintains a leveraged employee stock ownership plan (ESOP). In
April 1989, the ESOP borrowed $100 million to purchase 5,095,542 shares of the
Company's common stock at $19.625 per share. The debt of the ESOP is
guaranteed by the Company and is recorded in the Company's financial
statements. All ESOP shares are considered outstanding for earnings per share
purposes.
The ESOP shares are maintained in a suspense account until released and
allocated to participants' accounts. Shares committed-to-be-released,
allocated and remaining in suspense at December 31 were as follows:
1998 1997
---------- ----------
(Shares in thousands)
Committed-to-be-released............................... 303 289
Allocated.............................................. 1,801 1,741
Suspense............................................... 1,806 2,133
48
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the grandfather provisions of SOP 93-6, the expense recorded by the
Company is based on cash contributed or committed to be contributed by the
Company to the ESOP during the year, net of dividends received which are
primarily used by the ESOP to pay down debt. The Company's contributions to
the ESOP, along with related expense amounts, were as follows:
1998 1997 1996
----- ----- -----
(In millions)
Compensation expense...................................... $ 4.8 $ 4.2 $ 4.1
Interest expense.......................................... 4.3 4.9 5.3
Dividends................................................. 2.1 2.1 1.8
----- ----- -----
Total debt service payments............................. $11.2 $11.2 $11.2
===== ===== =====
The Company has certain employment agreements and a severance plan that
become effective upon a change in control of the Company, which will result in
compensation expense in the period that a change in control occurs.
12. Pension and Other Postretirement Benefits
The Company has qualified and nonqualified pension plans and other
postretirement benefit plans covering substantially all of its employees. The
Company's domestic pension and retiree health care and life insurance benefit
plans are discussed below. The Company's foreign plans and other defined
contribution plans are not significant individually or in the aggregate.
Pension and other postretirement benefit costs included the following
components for 1998, 1997 and 1996:
Other
Pension benefits postretirement benefits
---------------------- -------------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------- ------- -------
(In millions)
Service cost............. $ 17.2 $ 14.2 $ 15.5 $ 1.6 $ 1.5 $ 1.7
Interest cost............ 45.8 44.7 42.1 4.1 4.1 4.0
Expected return on plan
assets.................. (63.6) (56.5) (48.1) -- -- --
Amortization of prior
service cost............ 3.3 2.2 2.1 (0.5) (0.3) (0.3)
Amortization of net loss
(gain).................. 0.3 0.2 2.2 (0.6) (0.6) (0.4)
Amortization of transi-
tion asset.............. -- -- (5.6) -- -- --
------ ------ ------ ------- ------- -------
Net pension and other
benefit costs......... $ 3.0 $ 4.8 $ 8.2 $ 4.6 $ 4.7 $ 5.0
====== ====== ====== ======= ======= =======
49
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the changes in the plans' benefit obligations and fair
value of assets over the two-year period ending December 31, 1998, and a
statement of the funded status at December 31 for these years for the
Company's domestic pension plans follows. Pension plan assets include 1.8
million shares of the Company's common stock at December 31, 1998 and 1997.
Other
Pension postretirement
benefits benefits
-------------- ----------------
1998 1997 1998 1997
------ ------ ------- -------
(In millions)
Reconciliation of benefit obligation
Benefit obligation at previous December
31..................................... $656.9 $572.5 $ 75.3 $ 68.1
Service cost............................ 17.2 14.2 1.6 1.5
Interest cost........................... 45.8 44.7 4.1 4.1
Participant contributions............... -- -- 1.8 1.9
Plan amendments......................... 1.1 13.1 (2.7) --
Actuarial loss.......................... 36.3 44.3 1.5 3.0
Acquisitions............................ -- -- -- 0.7
Benefit payments........................ (35.5) (31.9) (4.7) (4.0)
------ ------ ------- -------
Benefit obligation at December 31......... 721.8 656.9 76.9 75.3
------ ------ ------- -------
Reconciliation of fair value of plan
assets
Fair value of plan assets at January 1.. 687.4 610.5 -- --
Actual return on plan assets............ 66.8 107.3 -- --
Employer contributions.................. 1.5 1.5 2.9 2.1
Participant contributions............... -- -- 1.8 1.9
Benefit payments........................ (35.5) (31.9) (4.7) (4.0)
------ ------ ------- -------
Fair value of plan assets at December 31.. 720.2 687.4 -- --
------ ------ ------- -------
Funded status
Funded status at December 31............ (1.6) 30.5 (76.9) (75.3)
Unrecognized prior service cost......... 26.0 28.3 (5.1) (2.8)
Unrecognized actuarial loss (gain)...... 28.0 (5.0) (9.1) (11.1)
------ ------ ------- -------
Prepaid (accrued) benefit cost............ $ 52.4 $ 53.8 $ (91.1) $ (89.2)
------ ------ ------- -------
The amounts recognized in the Company's balance sheets as of December 31
were as follows:
Other
postretirement
Pension benefits benefits
------------------ ----------------
1998 1997 1998 1997
-------- -------- ------- -------
(In millions)
Prepaid benefit cost.................. $ 76.1 $ 75.9 $ -- $ --
Accrued benefit liability............. (24.5) (23.0) (91.1) (89.2)
Accumulated other comprehensive
income............................... 0.8 0.9 -- --
-------- -------- ------- -------
Net amount recognized............... $ 52.4 $ 53.8 $ (91.1) $ (89.2)
======== ======== ======= =======
The Company's nonqualified pension plan and one of the qualified pension
plans had accumulated benefit obligations in excess of plan assets. The
unfunded nonqualified plan's accumulated benefit obligation was $24.3 million
and $23.0 million at December 31, 1998 and 1997, respectively. The qualified
pension plan's
50
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accumulated benefit obligation was $1.5 million and $1.2 million at December
31, 1998 and 1997, respectively. This plan's fair value of assets was $1.2
million at December 31, 1998 and 1997. The Company's other postretirement
benefit plans are not funded.
Prior service costs are amortized on a straight-line basis over the average
remaining service period of active participants. Accumulated gains and losses
in excess of 10 percent of the greater of the benefit obligation or the
market-related value of assets are amortized over the remaining service period
of active plan participants. The Company's benefit obligations were determined
using assumed discount rates of 6.75 percent in 1998 and 7.25 percent in 1997
and an assumed compensation increase of 5.5 percent in 1998 and 1997. The
assumed long-term rate of return on plan assets was 9.5 percent in 1998 and
1997.
The health care cost trend rate for 1999 for pre-65 benefits was assumed to
be 7.3 percent gradually declining to 5.0 percent in 2002 and to remain at
that level thereafter. The trend rate for post-65 benefits was assumed to be
5.0 percent and to remain at the 5.0 percent level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts reported. A
one percent increase in the assumed health care trend rate would increase the
service and interest cost components of net postretirement health care benefit
cost by $1.0 million in 1998 and increase the health care component of the
accumulated postretirement benefit obligation by $8.3 million at December 31,
1998. A one percent decrease in the assumed health care trend rate would
decrease the service and interest cost components of net postretirement health
care benefit cost by $0.8 million in 1998 and the health care component of the
accumulated postretirement benefit obligation by $6.6 million at December 31,
1998. The Company monitors the cost of health care and life insurance benefit
plans and reserves the right to make additional changes or terminate these
benefits in the future.
13. Income Taxes
The sources of earnings before income taxes are as follows:
1998 1997 1996
------ ------ ------
(In millions)
United States......................................... $285.7 $233.6 $284.9
Foreign............................................... (1.9) 2.6 5.4
------ ------ ------
Earnings before income taxes........................ $283.8 $236.2 $290.3
====== ====== ======
The income tax provision consisted of the following:
1998 1997 1996
------ ----- ------
(In millions)
Current tax expense
U.S. Federal......................................... $ 85.4 $69.9 $ 73.4
State and local...................................... 10.4 4.4 3.4
Foreign.............................................. 7.9 8.6 8.8
------ ----- ------
Total current...................................... 103.7 82.9 85.6
------ ----- ------
Deferred tax expense
U.S. Federal......................................... 5.2 (1.9) 11.1
State and local...................................... 2.3 3.9 6.9
Foreign.............................................. (6.0) 0.1 0.9
------ ----- ------
Total deferred..................................... 1.5 2.1 18.9
------ ----- ------
Total provision.................................... $105.2 $85.0 $104.5
====== ===== ======
51
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities at December 31 are as follows:
1998 1997
------ ------
(In millions)
Deferred tax assets
Product warranties......................................... $ 46.1 $ 40.9
Dealer allowances and discounts............................ 23.6 20.2
Insurance reserves......................................... 29.3 29.8
Strategic charge reserve................................... 24.0 28.7
Compensation and benefits.................................. 10.7 10.7
Other...................................................... 75.3 80.7
Valuation allowance........................................ (0.3) (0.3)
------ ------
Total deferred tax assets................................ $208.7 $210.7
------ ------
Deferred tax liabilities (assets)
Depreciation and amortization.............................. $ 52.8 $ 42.4
Deferred compensation...................................... (10.9) (8.4)
Postretirement and postemployment benefits................. (26.8) (26.1)
Other assets and investments............................... 93.5 90.7
Other...................................................... 56.5 45.7
------ ------
Total deferred tax liabilities........................... $165.1 $144.3
====== ======
No other valuation allowances were deemed necessary as all deductible
temporary differences will be utilized primarily by carry back to prior years'
taxable income or as charges against reversals of future taxable temporary
differences. Based upon prior earnings history, it is expected that future
taxable income will be more than sufficient to utilize the remaining
deductible temporary differences. Deferred taxes have been provided, as
required, on the undistributed earnings of foreign subsidiaries and
unconsolidated affiliates.
The difference between the actual income tax provision and the tax
provision computed by applying the statutory Federal income tax rate to
earnings before taxes is attributable to the following:
1998 1997 1996
------ ----- ------
(Dollars in
millions)
Income tax provision at 35%.......................... $ 99.3 $82.7 $101.6
State and local income taxes, net of Federal income
tax effect.......................................... 8.3 5.4 6.7
Foreign sales corporation benefit.................... (4.5) (3.3) (2.5)
Taxes related to foreign income, net of credits...... (0.4) 5.2 1.2
Goodwill and other amortization...................... 2.3 2.1 0.9
Other................................................ 0.2 (7.1) (3.4)
------ ----- ------
Actual income tax provision........................ $105.2 $85.0 $104.5
------ ----- ------
Effective tax rate................................... 37.1% 36.0% 36.0%
====== ===== ======
In December 1996, the Internal Revenue Service notified the Company that it
allocated $190.0 million in short-term capital gains and $18.1 million in
ordinary income to the Company and its subsidiaries for 1990 and 1991 in
connection with two partnership investments by the Company. The IRS alleges
that these investments lacked economic substance, were prearranged and
predetermined, and had no legitimate business purpose. The Company strongly
disagrees with the IRS position and contested the IRS allocation in a trial in
the United States
52
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax Court in September 1998. A decision has not yet been rendered. If the IRS
were to prevail, the Company would owe the IRS approximately $60 million in
taxes, plus accrued interest. The Company does not believe that this case will
have an unfavorable effect on the Company's results of operations.
14. Leases
The Company has various lease agreements for offices, branches, factories,
distribution and service facilities, certain Company-operated bowling centers
and certain personal property. These obligations extend through 2032. Most
leases contain renewal options and some contain purchase options. Many leases
for Company-operated bowling centers contain escalation clauses, and many
provide for contingent rentals based on percentages of gross revenue. No
leases contain restrictions on the Company's activities concerning dividends,
additional debt or further leasing. Rent expense consisted of the following:
1998 1997 1996
----- ----- -----
(In millions)
Basic expense........................................... $42.8 $35.2 $29.6
Contingent expense...................................... 0.9 1.1 0.4
Sublease income......................................... (1.7) (0.9) (1.1)
----- ----- -----
Rent expense, net....................................... $42.0 $35.4 $28.9
===== ===== =====
Future minimum rental payments at December 31, 1998, under agreements
classified as operating leases with non-cancelable terms in excess of one
year, are as follows:
(In millions)
-------------
1999........................................................... $ 25.8
2000........................................................... 22.9
2001........................................................... 20.2
2002........................................................... 19.3
2003........................................................... 18.2
Thereafter..................................................... 42.2
------
Total (not reduced by minimum sublease rentals of $5.4 mil-
lion)....................................................... $148.6
======
15. Preferred Share Purchase Rights
In February 1996, the Board of Directors declared a dividend of one
Preferred Share Purchase Right (Right) on each outstanding share of the
Company's common stock. Under certain conditions, each holder of Rights may
purchase one one-thousandth of a share of a new series of junior participating
preferred stock at an exercise price of $85 for each Right held. The Rights
expire on April 1, 2006.
The Rights become exercisable at the earlier of (1) a public announcement
that a person or group acquired or obtained the right to acquire 15 percent or
more of the Company's common stock or (2) 15 days (or such later time as
determined by the Board of Directors) after commencement or public
announcement of an offer for more than 15 percent of the Company's common
stock. After a person or group acquires 15 percent or more of the common stock
of the Company, other shareholders may purchase additional shares of the
Company at 50 percent of the current market price. These Rights may cause
substantial ownership dilution to a person or group who attempts to acquire
the Company without approval of the Company's Board of Directors.
53
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Rights, which do not have any voting rights, may be redeemed by the
Company at a price of $.01 per Right at any time prior to a person's or
group's acquisition of 15 percent or more of the Company's common stock. A
Right also will be issued with each share of the Company's common stock that
becomes outstanding prior to the time the Rights become exercisable or expire.
In the event that the Company is acquired in a merger or other business
combination transaction, provision will be made so that each holder of Rights
will be entitled to buy the number of shares of common stock of the surviving
Company that at the time of such transaction would have a market value of two
times the exercise price of the Rights.
16. Investments
The Company has certain unconsolidated foreign and domestic affiliates that
are accounted for using the equity method. Summary financial information of
the unconsolidated affiliates is presented below:
1998 1997 1996
------- ------- -------
(In millions)
Net sales........................................ $ 445.7 $ 483.3 $ 489.5
------- ------- -------
Gross margin..................................... $ 72.4 $ 80.9 $ 83.8
Net earnings..................................... $ 7.1 $ 10.9 $ 26.2
Company's share of net earnings.................. $ 4.9 $ 6.8 $ 14.7
------- ------- -------
Current assets................................... $ 182.3 $ 212.5 $ 199.3
Noncurrent assets................................ 164.5 157.5 153.0
------- ------- -------
Total assets................................... $ 346.8 $ 370.0 $ 352.3
Current liabilities.............................. $(170.4) $(182.3) $(170.1)
Noncurrent liabilities........................... (33.3) (36.0) (27.7)
------- ------- -------
Net assets..................................... $ 143.1 $ 151.7 $ 154.5
======= ======= =======
The Company's sales to and purchases from the above investments along with
the corresponding receivables and payables were not material to the Company's
overall results of operations for the three years ended December 31, 1998, and
its financial position as of December 31, 1998 and 1997.
The Company has made cash advances to the majority partner of a boat
company partnership, in which the Company has a minority interest, in
connection with long-term engine supply arrangements. These transactions have
occurred in the ordinary course of business and are backed by notes receivable
that are reduced as purchases of qualifying products are made. The notes
receivable are secured by the majority partner's interest in the boat company
partnership and are included in other long-term assets. Amounts outstanding
related to these arrangements as of December 31, 1998 and 1997, totaled $50.7
million and $44.3 million, respectively. Total assets as of December 31, 1998
and 1997, directly or indirectly related to this boat company partnership,
including trade receivables, the Company's investment and the aforementioned
supply agreement assets, were $78.6 million and $64.2 million, respectively.
54
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Treasury and Preferred Stock
Treasury stock activity for the past three years was as follows:
1998 1997 1996
------ ------ -----
(Shares in
thousands)
Balance at January 1,................................. 3,057 4,072 4,633
Compensation plans and other.......................... (576) (1,324) (561)
Stock repurchases..................................... 8,188 309 --
------ ------ -----
Balance at December 31,............................... 10,669 3,057 4,072
====== ====== =====
At December 31, 1998, 1997 and 1996, the Company had no preferred stock
outstanding (authorized: 12.5 million shares, $.75 par value at December 31,
1998).
18. Quarterly Data (unaudited)
Quarter
------------------------------------------------
1st 2nd 3rd 4th Year
--------- ---------- -------- -------- ---------
(In millions, except per share data)
1998
Net sales..................... $ 904.2 $ 1,113.0 $ 956.5 $ 971.5 $ 3,945.2
Gross margin.................. 256.3 317.7 257.7 254.4 1,086.1
--------- ---------- -------- -------- ---------
Earnings from continuing
operations(1)................ $ 58.9 $ 83.4 $ 4.1 $ 32.2 $ 178.6
Gain from discontinued
operations................... -- -- -- 7.7 7.7
--------- ---------- -------- -------- ---------
Net earnings(1)............... $ 58.9 $ 83.4 $ 4.1 $ 39.9 $ 186.3
--------- ---------- -------- -------- ---------
Per common share data
Basic earnings per common
share
Earnings from continuing
operations(1).............. $ .59 $ .84 $ .04 $ .34 $ 1.82
Gain from discontinued
operations................. -- -- -- .08 .08
--------- ---------- -------- -------- ---------
Net earnings(1)............... $ .59 $ .84 $ .04 $ .42 $ 1.90
--------- ---------- -------- -------- ---------
Diluted earnings per common
share
Earnings from continuing
operations(1).............. $ .59 $ .83 $ .04 $ .34 $ 1.80
Gain from discontinued
operations................. -- -- -- .08 .08
--------- ---------- -------- -------- ---------
Net earnings(1)............... .59 .83 .04 .42 1.88
--------- ---------- -------- -------- ---------
Dividends declared............ $ .125 $ .125 $ .125 $ .125 $ .50
--------- ---------- -------- -------- ---------
Common stock price (NYSE)
High........................ $35 11/16 $ 35 3/16 $25 3/16 $25 1/16 $35 11/16
Low......................... 27 3/8 22 9/16 12 13 12
- --------
(1) Includes a $60.0 million pretax ($41.4 million after tax) strategic charge
recorded in the third quarter.
55
BRUNSWICK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarter
--------------------------------------------------
1st 2nd 3rd 4th Year
-------- ---------- --------- -------- ---------
(In millions, except per share data)
1997
Net sales.................. $ 841.6 $ 1,008.2 $ 876.5 $ 931.1 $ 3,657.4
Gross margin............... 240.6 302.2 233.3 243.3 1,019.4
-------- ---------- --------- -------- ---------
Earnings (loss) from
continuing operations(1).. $ 52.7 $ 82.9 $ (17.1) $ 32.7 $ 151.2
Cumulative effect of change
in accounting principle... -- -- -- (0.7) (0.7)
Net earnings (loss)(1)..... $ 52.7 $ 82.9 $ (17.1) $ 32.0 $ 150.5
-------- ---------- --------- -------- ---------
Per common share data
Basic earnings (loss) per
common share
Earnings (loss) from
continuing
operations(1)........... $ .53 $ .84 $ (.17) $ .33 $ 1.52
Cumulative effect of
change in accounting
principle............... -- -- -- (.01) (.01)
-------- ---------- --------- -------- ---------
Net earnings (loss)(1)..... $ .53 $ .84 $ (.17) $ .32 $ 1.52
-------- ---------- --------- -------- ---------
Diluted earnings (loss)
per common share
Earnings (loss) from
continuing
operations(1)........... $ .53 $ .83 $ (.17) $ .32 $ 1.51
Cumulative effect of
change in accounting
principle............... -- -- -- (.01) (.01)
-------- ---------- --------- -------- ---------
Net earnings (loss)(1)..... $ .53 $ .83 $ (.17) $ .32 $ 1.50
-------- ---------- --------- -------- ---------
Dividends declared......... $ .125 $ .125 $ .125 $ .125 $ .50
-------- ---------- --------- -------- ---------
Common stock price (NYSE)
High..................... $ 29 3/8 $ 31 7/16 $35 11/16 $36 1/2 $ 36 1/2
Low...................... 23 5/8 26 1/4 30 1/8 27 9/16 23 5/8
- --------
(1) Includes a $98.5 million pretax ($63.0 million after tax) strategic charge
recorded in the third quarter.
56
BRUNSWICK CORPORATION
SIX-YEAR FINANCIAL SUMMARY
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
(In millions, except per share data)
Results of operations
data
Net sales............... $3,945.2 $3,657.4 $3,160.3 $2,906.3 $2,592.0 $2,125.0
Strategic charges....... 60.0 98.5 -- 40.0 -- --
Operating earnings...... 340.2 270.8 304.8 218.3 206.9 98.7
Earnings before income
taxes.................. 283.8 236.2 290.3 206.8 195.3 85.4
-------- -------- -------- -------- -------- --------
Earnings from continuing
operations............. $ 178.6 $ 151.2 $ 185.8 $ 133.6 $ 127.1 $ 53.8
Cumulative effect of
change in accounting
principles............. -- (0.7) -- -- -- (14.6)
Extraordinary loss from
retirement of debt..... -- -- -- -- -- (4.6)
Discontinued operations
Gain (loss) on
discontinued
operations............ 7.7 -- -- (7.0) -- (12.2)
Earnings from
discontinued
operations............ -- -- -- 0.6 1.9 0.7
-------- -------- -------- -------- -------- --------
Net earnings........... $ 186.3 $ 150.5 $ 185.8 $ 127.2 $ 129.0 $ 23.1
-------- -------- -------- -------- -------- --------
Basic earnings per
common share
Earnings from
continuing operations. $ 1.82 $ 1.52 $ 1.89 $ 1.39 $ 1.33 $ .57
Cumulative effect of
change in accounting
principles............ -- (.01) -- -- -- (.15)
Extraordinary loss from
retirement of debt.... -- -- -- -- -- (.05)
Discontinued operations
Gain (loss) on
discontinued
operations............ .08 -- -- (.07) -- (.13)
Earnings from
discontinued
operations............ -- -- -- .01 .02 .01
-------- -------- -------- -------- -------- --------
Net earnings........... $ 1.90 $ 1.52 $ 1.89 $ 1.33 $ 1.35 $ .25
-------- -------- -------- -------- -------- --------
Average shares used for
computation of basic
earnings per share..... 98.3 99.2 98.3 95.9 95.4 95.2
Diluted earnings per
common share
Earnings from
continuing operations. $ 1.80 $ 1.51 $ 1.88 $ 1.38 $ 1.33 $ .56
Cumulative effect of
change in accounting
principles............ -- (.01) -- -- -- (.15)
Extraordinary loss from
retirement of debt.... -- -- -- -- -- (.05)
Discontinued operations
Gain (loss) on
discontinued
operations............ .08 -- -- (.07) -- (.13)
Earnings from
discontinued
operations............ -- -- -- .01 .02 .01
-------- -------- -------- -------- -------- --------
Net earnings........... $ 1.88 $ 1.50 $ 1.88 $ 1.32 $ 1.35 $ .24
-------- -------- -------- -------- -------- --------
Average shares used for
computation of diluted
earnings per share..... 99.0 100.3 98.8 96.2 95.7 95.3
The Notes to Consolidated Financial Statements should be read in
conjunction with the above summary.
57
BRUNSWICK CORPORATION
SIX-YEAR FINANCIAL SUMMARY (Continued)
1998 1997 1996 1995 1994 1993
---------- ---------- --------- --------- --------- ----------
(In millions, except percentages and per share data)
Balance sheet data
Assets of continuing
operations............. $ 3,351.5 $ 3,241.4 $ 2,802.4 $ 2,310.6 $ 2,048.3 $ 1,922.0
Debt
Short-term............. $ 170.1 $ 109.3 $ 112.6 $ 6.1 $ 8.2 $ 11.9
Long-term.............. 635.4 645.5 455.4 312.8 318.8 324.5
---------- ---------- --------- --------- --------- ----------
Total debt............. 805.5 754.8 568.0 318.9 327.0 336.4
Common shareholders'
equity................. 1,311.3 1,315.0 1,197.7 1,043.1 910.7 804.4
---------- ---------- --------- --------- --------- ----------
Total capitalization... $ 2,116.8 $ 2,069.8 $ 1,765.7 $ 1,362.0 $ 1,237.7 $ 1,140.8
========== ========== ========= ========= ========= ==========
Cash flow data
Net cash provided by
operating activities... $ 429.0 $ 261.7 $ 395.8 $ 278.4 $ 121.2 $ 188.9
Depreciation and
amortization........... 159.7 156.9 129.7 118.0 118.0 116.0
Capital expenditures.... 198.0 190.5 169.9 118.0 101.1 94.2
Acquisitions of
businesses............. 32.8 515.4 360.6 10.3 7.1 2.1
Stock repurchases....... 159.9 8.4 -- -- -- --
Cash dividends paid..... 49.0 49.6 49.3 47.9 42.0 41.9
Other data
Dividends declared per
share.................. $ .50 $ .50 $ .50 $ .50 $ .44 $ .44
Book value per share.... 14.27 13.22 12.16 10.66 9.55 8.44
Return on beginning
shareholders' equity... 14.2% 12.6% 17.8% 14.7% 15.8% 6.5%
Effective tax rate...... 37.1% 36.0% 36.0% 35.5% 35.0% 37.0%
Debt-to-capitalization
rate................... 38.1% 36.5% 32.2% 23.4% 26.4% 29.5%
Number of employees..... 25,500 25,300 22,800 19,800 19,800 17,100
Number of shareholders
of record.............. 15,600 16,200 18,400 22,400 25,800 27,900
Common stock price
(NYSE)
High................... $ 35 11/16 $ 36 1/2 $ 25 3/4 $ 24 $ 25 1/8 $ 18 1/2
Low.................... 12 23 5/8 18 1/8 16 3/8 17 12 1/2
Close.................. 24 3/4 30 5/16 24 24 18 7/8 18
The Notes to Consolidated Financial Statements should be read in
conjunction with the above summary.
58
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 27, 1999 (except with respect to the matters discussed
in Note 6, as to which the dates are February 10, 1999 and February 16, 1999)
included in this Form 10-K, into the Company's previously filed registration
statements on Form S-8 (File No. 33-55022), Form S-8 (File No. 33-56193),Form
S-8 (File No. 33-61835), Form S-8 (File No. 33-65217), Form S-8 (File No. 333-
04289), Form S-3 (File No. 333-9997) and Form S-8 (File No. 333-27157).
Arthur Andersen LLP
Chicago, Illinois
March 22, 1999
59
BRUNSWICK CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Charges
to
Allowance for Balance at profit Balance
possible losses beginning and at end of
on receivables of period loss Write-offs Recoveries Other period
- --------------- ---------- ------- ---------- ---------- ----- ---------
1998................ $20.7 $8.5 $(6.0) $0.8 $(1.5)* $22.5
===== ==== ===== ==== ===== =====
1997................ $17.2 $7.6 $(6.5) $0.7 $ 1.7 * $20.7
===== ==== ===== ==== ===== =====
1996................ $16.9 $5.3 $(7.0) $0.4 $ 1.6 * $17.2
===== ==== ===== ==== ===== =====
- --------
*Includes 0.2 million, $3.6 million and $2.1 million in 1998, 1997 and 1996,
respectively, relating to acquisitions.
This schedule reflects only the financial information of continuing
operations.
Charges
to
Deferred tax Balance at profit Balance
asset valuation beginning and at end of
allowance of period loss Write-offs Recoveries Other period
- --------------- ---------- ------- ---------- ---------- ----- ---------
1998.................. $0.3 $- $- $ - $- $0.3
==== === === ===== === ====
1997.................. $0.3 $- $- $ - $- $0.3
==== === === ===== === ====
1996.................. $3.2 $- $- $(2.9) $- $0.3
==== === === ===== === ====
This account reflects the adoption of SFAS No. 109, "Accounting for Income
Taxes," which was adopted effective January 1, 1992. The Company utilized $2.9
million of capital loss carryforwards in 1996 to reduce income tax expense for
the year.
This schedule reflects only the financial information of continuing
operations.
60
EXHIBIT INDEX
Exhibit
No. Description
- -------- -----------
3.1 Restated Certificate of Incorporation of the Company filed as Exhibit
19.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1987, and hereby incorporated by reference.
3.2 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for 1995, and hereby incorporated by
reference.
3.3 By-Laws of the Company filed as Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, and hereby
incorporated by reference.
4.1 Indenture dated as of March 15, 1987, between the Company and
Continental Illinois National Bank and Trust Company of Chicago filed as
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1987, and hereby incorporated by reference.
4.2 Officers' Certificate setting forth terms of the Company's $125,000,000
principal amount of 7 3/8% Debentures due September 1, 2023, filed as
Exhibit 4.3 to the Company's Annual Report on Form 10-K for 1993, and
hereby incorporated by reference.
4.3 Form of the Company's $250,000,000 principal amount of 6 3/4% Notes due
December 15, 2006, filed as Exhibit 4.1 to the Company's Current Report
on Form 8-K dated December 10, 1996, and hereby incorporated by
reference.
4.4 Form of the Company's $200,000,000 principal amount of 7 1/8% Notes due
August 1, 2007, filed as Exhibit 4.1 to the Company's Current Report on
Form 8-K dated August 4, 1997, and hereby incorporated by reference.
4.5 The Company's agreement to furnish additional debt instruments upon
request by the Securities and Exchange Commission filed as Exhibit 4.10
to the Company's Annual Report on Form 10-K for 1980, and hereby
incorporated by reference.
4.6 Rights Agreement dated as of February 5, 1996, between the Company and
Harris Trust and Savings Bank filed as Exhibit 1 to the Company's
Registration Statement for Preferred Share Purchase Rights on Form 8-A
dated March 13, 1996, and hereby incorporated by reference.
10.1* Amended and Restated Employment Agreement dated January 4, 1999, by and
between the Company and Peter N. Larson.
10.2* Amended and Restated Employment Agreement dated December 1, 1998, by
and between the Company and Dudley E. Lyons.
10.3* Employment Agreement dated December 1, 1995, by and between the Company
and Peter B. Hamilton filed as Exhibit 10.8 to the Company's Annual
Report on Form 10-K for 1995 and hereby incorporated by reference.
10.4* Amendment dated as of October 9, 1998, to Employment Agreement by and
between the Company and Peter B. Hamilton filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998, and hereby incorporated by reference.
10.5* Form of Change of Control Agreement by and between the Company and each
of M. D. Allen, W. J. Barrington, G. W. Buckley, K. J. Chieger, F. J.
Florjancic, Jr., P. B. Hamilton, D. E. Lyons, R. S. O'Brien, V. J.
Reich, J. D. Russell, J. A. Schenk, R. L. Sell, K. B. Zeigler, and J.
P. Zelisko filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, and hereby
incorporated by reference.
10.6* 1994 Stock Option Plan for Non-Employee Directors filed as Exhibit A to
the Company's definitive Proxy Statement dated March 25, 1994, for the
Annual Meeting of Stockholders on April 27, 1994, and hereby
incorporated by reference.
10.7* 1995 Stock Plan for Non-Employee Directors filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998 and hereby incorporated by reference.
10.8* Supplemental Pension Plan filed as Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
and hereby incorporated by reference.
10.9* Form of insurance policy issued for the life of each of the Company's
executive officers, together with the specifications for each of these
policies, filed as Exhibit 10.21 to the Company's Annual Report on Form
10-K for 1980 and hereby incorporated by reference. The Company pays
the premiums for these policies and will recover these premiums, with
some exceptions, from the policy proceeds.
10.10* Form of Indemnification Agreement by and between the Company and each
of N. D. Archibald, J. L. Bleustein, M. J. Callahan, M. A. Fernandez,
P. Harf, J. W. Lorsch, R. P. Mark, B. Martin Musham, K. Roman, R. L.
Ryan and R. W. Schipke filed as Exhibit 19.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1986, and
hereby incorporated by reference.
10.11* Indemnification Agreement dated April 1, 1995, by and between the
Company and P. N. Larson filed as Exhibit 10.17 to the Company's Annual
Report on Form 10-K for 1995 and hereby incorporated by reference.
10.12* Indemnification Agreement by and between the Company and each of M. D.
Allen, W. J. Barrington, G. W. Buckley, K. J. Chieger, F. J.
Florjancic, Jr., P. B. Hamilton, D. E. Lyons, R. S. O'Brien, V. J.
Reich, J. D. Russell, J. A. Schenk, R. L. Sell, K. B. Zeigler and J. P.
Zelisko filed as Exhibit 19.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1986, and hereby incorporated
by reference.
10.13* 1991 Stock Plan filed as Exhibit A to the Company's definitive Proxy
Statement dated March 22, 1999, for the Annual Meeting of Stockholders
on April 21, 1999 and hereby incorporated by reference.
10.14* Change in Control Severance Plan filed as Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for September 30, 1998, and hereby
incorporated by reference.
10.15* Brunswick Performance Plan for 1998 filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for 1997, and hereby incorporated
by reference.
10.16* Brunswick Performance Plan for 1999.
10.17* Brunswick Strategic Incentive Plan for 1997-1998 filed as Exhibit 10.25
to the Company's Annual Report on Form 10-K for 1997 and hereby
incorporated by reference.
10.18* Brunswick Strategic Incentive Plan for 1998-1999 filed as Exhibit 10.26
to the Company's Annual Report on Form 10-K for 1997, and hereby
incorporated by reference.
10.19* Brunswick Strategic Incentive Plan for 1999-2000.
10.20* 1997 Stock Plan for Non-Employee Directors filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for September 30, 1998, and
hereby incorporated by reference.
10.21* Elective Deferred Compensation Plan filed as Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for September 30, 1998, and
hereby incorporated by reference.
10.22* Automatic Deferred Compensation Plan filed as Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for September 30, 1998, and
hereby incorporated by reference.
10.23* Employment Agreement dated July 1, 1997, by and between the Company and
Augustine Nieto filed as Exhibit 10.30 to the Company's Annual Report
on Form 10-K for 1997, and hereby incorporated by reference.
12 Statement regarding computation of ratio of earnings to fixed charges.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Public Accountants is on page 58 of this Report.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
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* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c) of
this Report.